Has Paychex, Inc. (PAYX) Become the Perfect Stock?

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Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing’s for sure: You’ll never discover truly great investments unless you actively look for them. Let’s discuss the ideal qualities of a perfect stock and then decide whether Paychex, Inc. (NASDAQ:PAYX) fits the bill.

Paychex, Inc. (NASDAQ:PAYX)The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it’s certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can’t produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management’s attention. Companies with strong balance sheets don’t have to worry about the distraction of debt.
  • Moneymaking opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can’t afford to pay too much for even the best companies. By using normalized figures, you can see how a stock’s simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can’t be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let’s take a closer look at Paychex.

Factor What We Want to See Actual Pass or Fail?
Growth 5-year annual revenue growth > 15% 2.7% Fail
1-year revenue growth > 12% 4.9% Fail
Margins Gross margin > 35% 69.9% Pass
Net margin > 15% 24.7% Pass
Balance sheet Debt to equity < 50% 0% Pass
Current ratio > 1.3 1.10 Fail
Opportunities Return on equity > 15% 34.4% Pass
Valuation Normalized P/E < 20 22.01 Fail
Dividends Current yield > 2% 4% Pass
5-year dividend growth > 10% 4.8% Fail
Total score 5 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Paychex last year, the company has dropped a point, as dividend growth has slowed down. The stock has posted only middling performance, rising between 5% and 10% over the past year.

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