Paychex (PAYX) has paid uninterrupted dividends since going public in 1988. While the company held its dividend flat during the financial crisis, it has otherwise increased its dividend every year since the mid-1990s and currently yields 3.6%.

PAYX has a very durable business model that throws off predictable free cash flow. We believe its dividend is very safe and offers at least average growth prospects, making it a good fit for our Conservative Retirees dividend portfolio.

Let’s take a closer look at the business.

Business Overview

PAYX was founded in 1971 and provides a range of payroll, human resource and benefits outsourcing services to over 590,000 small and medium-sized businesses. It offers a wide range of services including payroll processing (e.g. calculate, prepare and delivery employee payroll checks, prepare payroll tax returns, collect and remit client’s payroll obligations, etc.), retirement services (e.g. 401(k) plan design, recordkeeping, and plan management services), insurance (e.g. group health insurance, healthcare reform, workers’ comp, etc.), and a fully outsourced human resource solution (e.g. on-site personnel, employee handbooks, etc.). Essentially, PAYX helps businesses outsource non-core administrative services in a cost-effective manner so they can focus on their strengths.

Approximately 61% of PAYX’s revenue is derived from payroll services (includes a growing portfolio of standalone services – expense management, applicant tracking, time and labor), with the remaining 39% from human resource services (e.g. retirement, insurance, human resources).

Business Analysis

The services PAYX provides to businesses are mission-critical – payroll taxes must be correctly calculated and paid on time, insurance policies must conform with healthcare reform, proper records must be kept for 401(k) plans, and more.

As a small business owner, you want these jobs done correctly and efficiently. These aren’t tasks you want to lose any sleep or energy over. With fewer resources compared to larger companies, outsourcing these administrative tasks, which are constantly evolving as government regulations change, is usually more efficient.

With 50-plus years of operating history, a large direct sales force, numerous indirect sales channels (50% of new core payroll clients are referred by existing clients, CPAs, and banks), and substantial market share, PAYX is the trusted brand of choice.

PAYX has dominant market share positions in its key businesses. The company is #1 and #2 in payroll services for small and medium-sized businesses, respectively (PAYX pays one in every 15 private sector workers in the U.S.), #1 in retirement services record-keeping (as measured by number of plans), #23 in insurance services with more than 140,000 H&R covered lives, and provides HR services to more than 31,000 clients with over 858,000 worksite employees.

As long as customers’ administrative needs are being met with quality service at a reasonable price, they have few reasons to switch vendors. Their employees also become familiar with PAYX’s software (about 90% of PAYX’s mobile app usage comes from its clients’ employees who are doing things such as accessing their check stubs and W-2s), raising switching costs. As a result, PAYX’s client retention rate reached a new record high (82%) during its most recent fiscal year.

PAYX also has evolved to offer clients a larger scope of services compared to many smaller competitors. Going back just 10 years, PAYX’s business was 100% payroll services. However, the company now offers an array of human resource services (39% of revenue, which leverage the information gathered in PAYX’s base payroll processing service. Human resource services competitors that lack payroll services must depend on vendors like PAYX to power their solutions, putting them at a disadvantage.