Monday, June 16, 2008

* Stock Analysis: Paychex Inc (PAYX)

Linked here is a PDF copy of my detailed analysis of Paychex Inc (PAYX) (alt.1, alt.2). Below are some highlights from the above linked analysis:

Company Description: Paychex, Inc. provides payroll and integrated human resource and employee benefits outsourcing solutions for small- to medium-sized businesses in the United States.

Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description: 1.) Avg. High Yield Price, 2.) 20-Year DCF Price, 3.) Avg. P/E Price and 4.) Graham Number. PAYX is trading at a discount to all but 4.) above. If I exclude the high and low valuation, and average the remaining two valuations, PAYX is trading at an astounding 30.7% discount. A Star is added since PAYX is trading at a fair value.

Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description: 1.) Rolling 4-yr Div. > 15%, 2.) Dividend Growth Rate, 3.) Years of Div. Growth, 4.) 1-Yr. > 5-Yr Growth and 5.) Payout 15% of avg. PAYX earned two Stars in this section for 2.) and 3.) above. PAYX has paid a dividend since 1988 and has increased its dividend for the last 18 years (calendar year).

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description: 1.) NPV MMA Diff. and 2.) Years to >MMA. PAYX earned both Stars available in this section. If PAYX grows its dividend at 17.6% per year, it will only take 3 years to equal the long-term average money market rate of 4.61%. PAYX's NPV MMA Diff is an eye-popping $72,195.

Other: PAYX is a member of the S&P 500, is an Achiever, but is not an Aristocrat. The company has a strong balance sheet and generates a steady stream of cash. Risks to PAYX include the highly competitive nature of the outsourcing industry, low barriers of entry and the threat of alternative products. ADP, the industry leader, is promoting a payroll and tax software solution using Microsoft's small business software. This could potentially affect Paychex's growth in the small office market.

Conclusion: PAYX earned a Star in the Fair Value section, earned two Stars in the Dividend Analytical Data section and earned two Stars in the Dividend Income vs. MMA section for a net total of 5 Stars. This rates PAYX as a 5 Star-Strong Buy.

I don't think PAYX can sustain a 17% dividend growth rate in the near-term. Using my [D4L-PreScreen.xls] model I have determined that the growth rate can fall to 10.8% and PAYX will still generate the $10,000 NPV MMA Diff that I am looking for. Entering the 10.8% dividend growth rate into my [20-Year-DCF.xls] model and setting the EPS growth rate to 10.8%, the calculated fair-value of PAYX is $35.13, slightly above Friday's $33.65 closing price.

Historically, PAYX raises its dividend in August with a July declaration date. Based on the above analysis, I am comfortable adding to my PAYX position, as my allocation and valuation allows, but I will likely wait until after the next dividend declaration.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I owned shares of PAYX (2.8% of my Income Portfolio).

What are your thoughts on PAYX?

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