Paychex, Inc. (NASDAQ:PAYX) finds itself well positioned in its industry. As the second-largest payroll-processing company in the country, it stands to benefit from a growing job market. PAYX stock has steadily increased in price since 2009.
Now as the economy is sustaining higher levels of employment and job growth, Paychex appears poised for double-digit profit growth. Given the profit growth and the investor benefits the company offers, Paychex stock stands as the equity of choice for payroll services industry investors.
Favorable Industry Trends Amid Competition
PAYX is the nation’s second-largest payroll provider, serving over 600,000 payroll clients. Only its peer Automatic Data Processing (NASDAQ:ADP) processes more payroll checks.
Both also face competition from Workday Inc (NASDAQ:WDAY), a human and financial capital management software provider. However, its software package, Workday HCM, primarily works with larger companies with more data-intensive needs. PAYX designed the competing Paychex Flex product for the needs of small and medium-sized businesses.
Industry trends look favorable for business at all levels. The job market is seeing 2.7% wage growth, slightly below where it had been in the past. Paychex CEO Marty Mucci said in a recent interview that the economy is in a “steady state of business formation” and that job growth remains “steady and sustainable.” This positions PAYX profit levels to continue increasing.
PAYX Stock Benefits From High Dividends and High Growth
Paychex outperforms its larger archrival in every respect. PAYX stock has maintained a long track record of revenue and earnings growth rates that stand in the high single digits.
Mr. Mucci believes profit growth could exceed 10% in future years. Consensus profit estimates back up this assertion. Contrast this with ADP which averages a little over 3% growth with revenue and about 4.5% per year in net income.
Moreover, PAYX stock pays a higher dividend yield. The company announced that it will maintain its 50-cent-per-share dividend for the quarter. Paychex raised the quarterly dividend from 46 cents per share last July. At current prices, this takes the yield to 3.25%.
The company has announced a dividend increase every July since 2014. Given this trend, investors will likely see another increase this coming July. While ADP has a longer track record of annual dividend increases, its dividend yield stands at just over 2.1%.
Paychex Stock Has a Lower PE Than Its Rivals
Despite higher dividends and profit growth, PAYX stock trades at a lower price-to-earnings (PE) ratio. Paychex’s current PE stands at just over 24, compared with 29 for ADP.
The forward PE looks even more compelling for PAYX. Expected profit growth brings PAYX’s forward PE to about 21.8. WDAY stock, which tends to behave more like a tech equity, has no PE multiple since it currently operates at a loss. The estimated forward PE for WDAY stands at over 100 times earnings.
The average forward PE in business services is about 22.5. This measure makes PAYX stock fractionally under fair value. While the stock would not be considered a “bargain,” it would be my choice if I wanted to invest in the payroll services industry. With job growth continuing and a large, increasing dividend, investors should enjoy a safe and sustainable level of profit in PAYX stock.
Final Thoughts on PAYX Stock
A fair valuation, a high dividend, and continuing profit growth increases make PAYX stock the best in the payroll industry. ADP boasts a larger client base and also shares in the benefits of employment increases. Still, it sees lower rates of profit growth than PAYX.
Paychex stock investors also enjoy the highest dividend yield in the payroll services industry. Despite the higher dividend returns, investors who take a position now will buy in at a lower PE than with ADP or WDAY.
No stock bargains currently exist in the payroll industry. However, for those wanting to buy a payroll services equity now, PAYX stock stands as the clear choice.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.