Dividend Investor Portfolio #28: Human Capital Wealth
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Dear Investor,
Welcome to the 28th edition of TipRanks’ Dividend Investor Portfolio & Newsletter.
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Market-Moving News: September 30, 2024
Stocks rose for a third consecutive week, extending their recovery from a sharp drop at the beginning of the month. The S&P 500 (SPX) gained 0.62% for the week, and the Dow Jones Industrial Average (DJIA) rose by 0.59%. Meanwhile, the tech benchmarks Nasdaq Composite (NDAQ) and Nasdaq-100 (NDX) were up by 0.95% and 1.10%, respectively. The DJIA has reached another record, while the NDAQ ended up less than 3% from its recent high.
Markets rode the wave of continued optimism stemming from the Federal Reserve’s grand opening of the easing season. Positive macro data considerably propped up investor optimism, supporting the economic Goldilocks narrative.
The robust health of household consumption – a key growth driver – received another badge of approval as the UoM Consumer Sentiment index jumped to a six-month high. Meanwhile, the Fed’s preferred inflation gauge, Core PCE, showed further steady easing of price pressures, printing a smaller-than-expected increase (the lowest since February 2021). In addition, the final estimate for Q2 GDP confirmed an annualized growth rate at a healthy clip of 3%.
The data continues to confirm the central bank’s assessment of declining inflation amid gradually decelerating economic growth, while consumption is still strong and the job market remains resilient. That resilience is widely expected to be confirmed in the upcoming September labor-market reports scheduled for this Friday. Economists estimate that the unemployment rate remained unchanged from August’s 4.2%, while payrolls slightly rose from the previous month. The actual job market data will influence the scope of the next Fed rate cut at the policymakers’ next meeting in November. At the moment, traders see an even chance between a 0.25% and a 0.50% rate reduction.
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This Week’s Quality Dividend Stock Idea
Paychex (PAYX) is a leading provider of integrated human capital management (HCM) solutions, delivering a full suite of technology and advisory services in human resources (HR), employee benefits solutions, insurance, and payroll processing. The company mainly serves small- and medium-sized enterprises (SMEs).
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History of Customer Satisfaction
Paychex was founded in 1971 and performed an IPO in 1983. Its operations grew and expanded over the years through internal investment as well as acquisitions. Paychex has acquired 13 firms; the latest buyout was the acquisition of SME financing solutions provider Alterna Capital Solutions in October 2023.
Paychex has a market capitalization of $49 billion and annual revenue of $5.3 billion. It serves over 745,000 SMEs across the U.S. and parts of Europe (although revenues from European activities comprise about 1% of the total). Its industry expertise and continuous investment in knowledge and innovation allow PAYX to offer its customers a full range of customizable offerings, helping them to adapt to the constantly evolving environment.
The company offers a cloud-based platform optimized to meet the HR and payroll needs of small- and medium-sized organizations, which is scalable and customizable, meaning that clients can add services on demand. While PAYX has the breadth of solutions to cover the spectrum of the employee life cycle, its platform also offers integrations with popular HR, accounting, point-of-sale, and productivity applications.
Paychex offers its services via the Software as a Service (SaaS) model that reduces total cost of ownership for its clients, while simultaneously benefiting PAYX through recurring revenues leading to income predictability. These also contribute to lower costs and higher customer satisfaction and retention rates. The company’s client retention rate is about 83%, and 122,000 of the company’s clients have been with Paychex for over 10 years.
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Business Model Key to Revenue Stability
This business model also permits faster and safer implementation of updates and improvements, as well as the introduction of new advanced features. In fact, despite operating in the seemingly traditional, low-tech sphere, PAYX is a very innovative firm. This status has been confirmed multiple times: in 2024, it was listed in Fortune magazine’s list of America’s Most Innovative Companies for the second consecutive year.
The company was praised for the use of AI in HR already in 2020. Its vast data sets power advanced data analytics and artificial intelligence capabilities. In September 2024, Paychex made headlines in the professional press as it introduced Recruiting Copilot – a new AI-assisted recruiting tool that helps SMEs quickly find top talent. The AI Copilot is embedded in PAYX’s proprietary HCM SaaS platform, Paychex Flex.
Paychex has three operating segments. The largest is its Management Solutions segment, responsible for over 73% of revenue, which provides payroll processing services and a host of other services including HR solutions, compliance services, and retirement services administration. The Professional Employer Organization (PEO) and Insurance Solutions segment (~24% of total revenue) serves as a co-employer of PAYX clients’ employees, providing businesses a combined package that includes payroll, compliance, HR, and employee benefits administration, as well as insurance and other services. About 3% of total revenues arrive from Interest Earned on Client Funds, as PAYX invests these funds in various securities between pay periods.
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Perfect Financials and Robust Metrics
The company boasts perfect financial health, with zero net debt (it has more cash than debt), earning more interest than it pays on its debt, and short-term assets more than covering both its short- and long-term liabilities.
In addition, the company shines in terms of capital efficiency and profitability metrics. Its ROA and ROIC are significantly above the average for its industry, while its ROE of 46.5% is better than that of 95% of its peers. Paychex’s operating, FCF, and net profit margins are also in the top 5% of its industry.
In the past five fiscal years, PAYX’s revenues have grown at a CAGR of 7%, considerably accelerating over the three years following the pandemic. Adjusted earnings have grown at a CAGR of 11% in the past half-decade, with the rate of growth jumping to about 15% in the last three years.
In June, Paychex reported for fiscal Q4 and full fiscal year 2024, which ended on May 31st; its FQ1 2025 is expected to be released on October 1st. In FY 2024, the company grew its revenue by 5%, while its operating income rose by 9%, and adjusted diluted EPS increased by 11% from FY 2023. Notably, its smallest operating segment – Interest on Client Funds – significantly contributed to revenue growth with a surge of 47% due to higher average interest rates and lower realized losses on investment sales.
The company issued a conservative outlook for FY 2025, envisioning revenue growth in the range of 4-5.5% and EPS growth of 5-7%. There is a notable chance that PAYX would beat its own projections, as underscored by its long track record of beating analyst quarterly EPS estimates.
In addition, the company consistently produces large amounts of cash: it ended FY 2024 with $1.74 billion in free cash flows, an increase of 11.1% from FY 2023. Cash flow from operations was $1.9 billion for the fiscal year, 11.2% more than in the previous year.
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Remarkable Shareholder Compensation
Strong operational performance and a stellar balance sheet support Paychex’s shareholder compensation strategy, which includes dividends and share repurchases. Over the past five years, the company returned almost $6 billion to shareholders through these channels.
Paychex has been paying dividends for 33 years. Its 12-year track record of annual payout increases make it a Dividend Contender. In the past half-decade, PAYX grew its dividends at a CAGR of over 10%, with dividend growth accelerating to 13.2% in the past three years. During fiscal year 2024, the company distributed 78% of net income to shareholders through dividend payments.
Analysts project that over the next couple of years, Paychex’s dividends will continue to increase at an annual rate of 6-7%. That is even though the company’s current dividend yield of 2.9% is considerably higher than average for its sector. PAYX also pays higher dividend yield than almost all of its competitors, including the HR solutions giant (and Dividend Portfolio holding) Automatic Data Processing (ADP).
In addition to dividends, Paychex compensates its shareholders through opportunistic buybacks. In January this year, the company approved a program to repurchase up to $400 million of stock with authorization through May 31, 2027; the new program replaced the previous one, which expired at the time of announcement. During fiscal year 2024, PAYX repurchased 1.5 million shares of its common stock for $169.2 million.
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Reasonable Valuation Despite Strong Performance
For the biggest part of the past year, the stock market returns were led by technology stocks, drawing most, if not all, investor attention. Thus, indispensable but “boring” companies like PAYX underperformed the AI-spurred S&P 500 in the past year. Still, Paychex did better than all of its competitors, even slightly outperforming ADP.
Now, the beginning of the Fed easing cycle is having its effect on stocks, and various industries are outperforming the tech sector stocks. In addition, interest-rate cuts are very positive for SMEs, and as such, for Paychex’s business. Thus, in the past three months, PAYX surged by almost 15%, triple the gain of the S&P 500. As the rally broadens out, this outperformance may continue.
Despite the strong stock performance, Paychex is still reasonably valued. Its current PE is in line with the average for the Professional Services industry. PAYX comes in near the bottom of the valuation scale for its U.S. competitors. Taking into account its future cash flows, the company looks undervalued by about 25%.
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Investing Takeaway
Paychex, Inc. is a leading provider of human capital management solutions for small and medium-sized enterprises, with a strong track record of customer satisfaction and retention. The company demonstrates excellent financial health, with zero net debt and impressive profitability metrics. It has consistently grown its revenue and earnings while generating strong cash flow. Paychex rewards shareholders through dividends and share repurchases, offering an attractive dividend yield and payout growth outlook. Despite recent strong stock performance, the company remains reasonably valued compared to its competitors. These factors make PAYX an appealing addition to long-term income portfolios.
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Dividend Investor Portfolio
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Portfolio News
¤ The Ex-Dividend date for Philip Morris (PM) was September 26th. On October 10th, the dividend payment date, the tobacco giant will pay a quarterly dividend of $1.35 per share, an increase from the prior quarterly dividend of $1.30 per share.
¤ The Ex-Dividend date for JPMorgan Chase & Co. (JPM) is October 4th. On October 31st, the dividend payment date, the world’s largest bank will pay a quarterly dividend of $1.25 per share, an increase from the prior quarterly dividend of $1.15 per share.
¤ The Ex-Dividend date for Edison International (EIX) is October 7th.
¤ According to the reports in the press, Automatic Data Processing (ADP) is in talks to buy WorkForce Software, a privately held firm, for about $1.2 billion.
¤ Goldman Sachs has initiated coverage of Allianz SE (ALIZY) with a “Buy” rating and a price target of EUR 349, implying an upside of about 19% over the next 12 months.
¤ Amgen (AMGN) fell from the all-time high reached on September 20th following the disclosure of underwhelming trial data on two drugs in development. In other company news, Amgen scored a win against its rival Regeneron, whose request for a preliminary injunction was dismissed. Regeneron tried to prevent Amgen from launching a biosimilar to its blockbuster eye drug, the patent on which expired in May. While Regeneron is expected to appeal, Amgen can now launch its medicine at risk.
¤ Qualcomm (QCOM) has been in talks about a potential takeover of the struggling chip producer Intel, according to media reports. The acquisition, which could be worth $90 billion, would help QCOM diversify its business into areas outside of smartphones and tablets. However, the deal would undoubtedly face regulatory hurdles and antitrust scrutiny.
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Recent Trades
We are happy to announce a new addition to our Portfolio. We are adding VICI Properties (VICI), which we recommended in our Newsletter on June 3rd.
VICI Properties is an experiential property-focused real estate investment trust (REIT), formed in 2017. Since its formation, VICI has invested around $35 billion in the U.S. and international markets across gaming and other experiential assets. With a market capitalization of almost $35 billion and annual revenues of $3.61 billion, VICI owns one of the largest portfolios of gaming, hospitality, and entertainment destinations in the U.S. These include Caesars Palace, MGM Grand, and the Venetian Resort in Las Vegas.
The REIT’s largest tenants are the leading U.S. casino operating companies Caesars Entertainment and MGM Resorts, who together operate 31 of VICI’s 54 gaming properties. Currently, casino properties are responsible for the bulk of VICI’s revenues. However, the company leverages its casino income to diversify its portfolio holdings, which should eventually result in a reduction of its exposure to the gaming industry while simultaneously increasing its growth runway. Thus, it owns a growing array of real estate and financing partnerships with leading non-gaming experiential operators, including fitness, bowling alleys, golf courses, and other non-gambling venues.
VICI’s properties are fully occupied and are leased through triple-net lease agreements. Most of VICI’s property leases are long-term, ranging from 15 to 32 years with an option for renewal, and include annual base rent escalations. As a result, the company’s revenues are highly stable and predictable.
VICI’s financial health is remarkably robust, with its net debt-to-equity ratio at 62.7%, as opposed to 100%+ at many REITs. Its debt is investment-grade rated by all three of the world’s leading credit-rating agencies. VICI’s total liabilities of $18.4 billion are dwarfed by its vast assets, which total $44.5 billion. Its capital efficiency and profitability metrics far exceed those of its peers in the industry. Thus, VICI’s ROE and ROA, as well as FCF and net income margins, come in the top 25% of the REITs industry, while its gross and operating margins are in the top 3%.
The company’s strong finances, stable revenue streams, and operational excellence support its high dividend yield, which is also growing at a notable clip. Its current dividend yield is a very high 5.2%, far above the industry ratio of 3.9%, and coming in the top 25% dividend payers in the U.S. market.
VICI’s earnings-based dividend payout ratio of 63.5% and cashflow-based ratio of 79.2% are very moderate for a REIT, leaving the company with ample room for further dividend growth while having sufficient capital for business expansion.
VICI has been paying and increasing its dividend consistently since going public in 2018, with the payouts growing at a CAGR of ~8% (versus the peer average of 2.2% growth). Analysts are penciling in a ~5% dividend growth for the next couple of years, as its ample financial flexibility and strong growth potential allow the company to continue increasing its payout for years to come.
The REIT’s stock has risen by a little over 13% in the past year, with all of the gains occurring in the past two months. The improved stock performance was led by expectations for the Federal Reserve’s interest-rate cuts, which boosted investor sentiment towards REITs. Despite a surge of almost 20% over that period, VICI still trades at very attractive valuations, carrying large discounts both to the Real Estate sector and the Specialized REITs industry averages. Compared to its relevant peers, VICI comes at the bottom of the valuation range. In addition, it is about 55% undervalued based on its future cash flows.
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Portfolio Attributes
| Dividend Portfolio Yield |
Expected Dividend Growth | Expected Annual Income |
| 3.95% | +9.52% | $4,606.96 |
| Yield-on-Cost Adjusted, Weighted |
Average Analyst 12-Month Growth Outlook | 10K Per Stock at the Time of Purchase |
Current Portfolio
| Name | EX-Dividend Date | Payment Date | Yield on Cost | Annual DPS |
| Automatic Data Processing (ADP) | Sep 10, 2024 | Oct 03, 2024 | 2.24% | $5.60 |
| Allianz SE ADR (ALIZY) | May 09, 2025 | May 28, 2025 | 5.67% | $1.49 |
| Amgen (AMGN) | Nov 15, 2024 | Dec 06, 2024 | 3.09% | $9.00 |
| BlackRock (BLK) | Dec 08, 2024 | Dec 23, 2024 | 2.56% | $20.40 |
| Edison International (EIX) | Sep 27, 2024 | Oct 31, 2024 | 4.82% | $3.12 |
| EOG Resources (EOG) | Oct 17, 2024 | Oct 31, 2024 | 3.95% | $3.64 |
| JPMorgan Chase (JPM) | Oct 05, 2024 | Oct 31, 2024 | 2.86% | $5.00 |
| Kroger (KR) | Nov 15, 2024 | Dec 01, 2024 | 2.82% | $1.28 |
| LyondellBasell (LYB) | Nov 24, 2024 | Dec 04, 2024 | 5.27% | $5.36 |
| Philip Morris (PM) | Sep 12, 2024 | Oct 10, 2024 | 6.06% | $5.40 |
| Qualcomm (QCOM) | Nov 29, 2024 | Dec 13, 2024 | 2.25% | $3.40 |
| VICI Properties (VICI) | Dec 20, 2024 | Jan 04, 2025 | 5.19% | $1.72 |
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Click here for more stock market analysis from TipRanks Macro & Markets research analyst Yulia Vaiman
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Disclaimer
The information contained in this article represents the views and opinions of the writer only, and not the views or opinions of TipRanks or its affiliates and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy, or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment, and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices, or performance.
