The main point of investing for the long term is to make money. But more than that, you probably want to see it rise more than the market average. But Paychex, Inc. (NASDAQ:PAYX) has fallen short of that second goal, with a share price rise of 61% over five years, which is below the market return. Looking at the last year alone, the stock is up 14%.
So let’s assess the underlying fundamentals over the last 5 years and see if they’ve moved in lock-step with shareholder returns.
See our latest analysis for Paychex
There is no denying that markets are sometimes efficient, but prices do not always reflect underlying business performance. By comparing earnings per share (EPS) and share price changes over time, we can get a feel for how investor attitudes to a company have morphed over time.
During five years of share price growth, Paychex achieved compound earnings per share (EPS) growth of 10% per year. This EPS growth is remarkably close to the 10% average annual increase in the share price. This indicates that investor sentiment towards the company has not changed a great deal. Rather, the share price has approximately tracked EPS growth.
The image below shows how EPS has tracked over time (if you click on the image you can see greater detail).
It’s probably worth noting that the CEO is paid less than the median at similar sized companies. It’s always worth keeping an eye on CEO pay, but a more important question is whether the company will grow earnings throughout the years. This free interactive report on Paychex’s earnings, revenue and cash flow is a great place to start, if you want to investigate the stock further.
What About Dividends?
As well as measuring the share price return, investors should also consider the total shareholder return (TSR). The TSR is a return calculation that accounts for the value of cash dividends (assuming that any dividend received was reinvested) and the calculated value of any discounted capital raisings and spin-offs. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. As it happens, Paychex’s TSR for the last 5 years was 86%, which exceeds the share price return mentioned earlier. And there’s no prize for guessing that the dividend payments largely explain the divergence!
A Different Perspective
Paychex provided a TSR of 17% over the last twelve months. But that return falls short of the market. On the bright side, that’s still a gain, and it’s actually better than the average return of 13% over half a decade This could indicate that the company is winning over new investors, as it pursues its strategy. It’s always interesting to track share price performance over the longer term. But to understand Paychex better, we need to consider many other factors. For example, we’ve discovered 1 warning sign for Paychex that you should be aware of before investing here.
We will like Paychex better if we see some big insider buys. While we wait, check out this free list of undervalued stocks (mostly small caps) with considerable, recent, insider buying.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on American exchanges.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.