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Paychex and Payroll Profits
06/18/2018 5:00 am EST
Dividend growth is solid because the business supporting the dividend is solid. Paychex is the second-largest provider of payroll processing, human resources, and benefits services in the United States.
Paychex takes a smaller-is-better view of the world. Roughly 99% of its clients are businesses composed of fewer than 100 employees. The average client size of the business is approximately 16 employees.
The worldwide market for business services totaled $131 billion in 2016, according to a May 2017 report by market researcher IDC. Between 2016 and 2021, IDC expects the segment to grow at a 6.4% compound annual growth rate. Paychex’s niche of the sector should, at the least, maintain a similar growth rate.
The National Federation of Independent Business (NFIB) represents 325,000 small businesses in the United States. NFIB’s small business optimism index posted a 16th consecutive month in the top 5% of 45 years of survey readings for April. A net 20% of small-business owners plan to create new jobs.
Paychex’s customer base will continue to grow. Paychex will grow with it. Fiscal-year 2018 will end this month. Paychex guided for annual revenue to finish 7% higher. The company should report $3.37 billion in revenue for the year.
Management expects net income growth to exceed revenue growth. Net income --embellished by tax reform -- should grow 13% year over year to post at $923 million. EPS should post at $2.55.
We expect total revenue to grow 7% in fiscal-year 2019. Revenue should post near $3.6 billion. We expect EPS to post near $2.80. We think our estimate is conservative. It neglects the impact of share repurchases, which we expect to occur with greater frequency in fiscal-year 2019.
Paychex is a cash-generating machine. It generated posted $1 billion in free cash flow over the trailing 12 months. Free cash flow is up 29% over the past three years.
Cash and total corporate investments stood at $826.6 million at the end of February -- double the amount three years earlier. The cash will be used to support additional share buybacks and dividend increases. The dividend was recently increased 12%. As the dividend goes, so goes the share.
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