Yahoo Finance Just Three Days Till Paychex, Inc. (NASDAQ:PAYX) Will Be Trading Ex-Dividend
Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Paychex, Inc. (NASDAQ:PAYX) is about to trade ex-dividend in the next 3 days. You will need to purchase shares before the 31st of July to receive the dividend, which will be paid on the 27th of August.
Paychex's next dividend payment will be US$0.62 per share, and in the last 12 months, the company paid a total of US$2.48 per share. Calculating the last year's worth of payments shows that Paychex has a trailing yield of 3.4% on the current share price of $72.19. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether Paychex has been able to grow its dividends, or if the dividend might be cut.
View our latest analysis for Paychex
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Its dividend payout ratio is 81% of profit, which means the company is paying out a majority of its earnings. The relatively limited profit reinvestment could slow the rate of future earnings growth. We'd be worried about the risk of a drop in earnings. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Dividends consumed 68% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.
It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Fortunately for readers, Paychex's earnings per share have been growing at 10% a year for the past five years. The company paid out most of its earnings as dividends over the last year, even though business is booming and earnings per share are growing rapidly. Higher earnings generally bode well for growing dividends, although with seemingly strong growth prospects we'd wonder why management are not reinvesting more in the business.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, 10 years ago, Paychex has lifted its dividend by approximately 7.2% a year on average. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.
Final Takeaway
Is Paychex an attractive dividend stock, or better left on the shelf? It's good to see earnings are growing, since all of the best dividend stocks grow their earnings meaningfully over the long run. However, we'd also note that Paychex is paying out more than half of its earnings and cash flow as profits, which could limit the dividend growth if earnings growth slows. In summary, while it has some positive characteristics, we're not inclined to race out and buy Paychex today.
While it's tempting to invest in Paychex for the dividends alone, you should always be mindful of the risks involved. To help with this, we've discovered 1 warning sign for Paychex that you should be aware of before investing in their shares.
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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