3 Business Services Paying Dividends

Published Wed, 13 Mar 2013 11:00 CET by DividendYields.org

As per a research report by Hoovers, the US Business Services industry generates annual revenue of around $580B. Main segments of the industry include accounting & corporate finance, advertising and marketing, consultancy, IT outsourcing, business outsourcing, human resource, international trade, staffing services, solid waste handling, facilities services, office administrative solutions, travel services, etc. The business services industry index for the US companies has grown by 66% from June 2009 to March 2013, compared with a growth of 69% in S&P 500 during the same period. With improvement in jobs data in the last few quarters and expected turnaround in the US economy, requirement for business services is likely to grow at a reasonable rate. As part of their efforts to reduce cost, organizations engage outsourcing service providers for payroll, human resource, tax, benefits administration etc. In addition, growth in world economy is likely to increase the volume of money movement across the world in the form of remittances. These trends are likely to benefit companies from various segments of the business services industry. The industry is expected to grow at an annual compounded rate of 4% from 2010 to 2015, according to Nasdaq. Here, three stocks which have shown reasonable growth and provided decent dividend yields over past years, are discussed in detail.

Dividend Yield Table
Automatic Data Processing (Nasdaq: ADP) is one of the world’s largest providers of business outsourcing solutions with more than 60 years experience in providing services in the area of human resource, payroll, tax and benefits administration. The company has more than 600,000 clients and is also a leading provider of integrated computing solutions to auto, truck, motorcycle, marine, recreational vehicle, and heavy equipment dealers around the world. The market cap of the company is around $31B with institutional ownership being 77%. For the fiscal year ending 30th June 2012, the company recorded a revenue of $10.665B with a net income of $1.389B (net profit margin of 13%). In the year ending 30th June 2009, the revenue and net income were $8.84B and $1.33B respectively, indicating 21% & 4% growth during the period. The stock is trading with a P/E multiple of 23, with price to book ratio of 5.06. Current dividend yield is 2.72% and the payout ratio is a healthy 55%. Five year average yield is in excess of 3% and ADP has a history of continuous, quarterly dividend payments since 1974. The stock is up 16% over the last one year. However, the PEG ratio (5 year estimate) is 2.37, which is relatively high.

Paychex (Nasdaq: PAYX) is a leader in the payroll, human resource, and benefits outsourcing industry. Founded in 1971, Paychex is serving around 567,000 small and medium sized businesses mainly across the USA. The market cap is $12.35B, with the institutions holding around 70% shares. For the fiscal year ending 31st May 2012, the company clocked a revenue of $2.23B and a net income of $548M (NPM of 24.58%). For the period ending ending 31st May 2009, corresponding figures were $2.08B and $533M respectively, indicating modest growth, with nearly stable margins. The P/E multiple is 22 and P/B ratio is 7.67. Current dividend yield is 3.89% and the payout ratio is 84%. Five year average yield is in excess of 4%, and Paychex has been continuously paying quarterly dividends since 1988. The stock is up by around 8% over the last one year. The PEG ratio (5 year estimate) is again, relatively high at 2.23.

Western Union (NYSE: WU) is an iconic and world renowned organization engaged in money movement and payment services. The company’s business payments service provides consumers and businesses with options for making one-time or recurring bill payments, including B2B cross-border, cross currency payment transactions. It operates in C2C and global business payments segments. Its other businesses include Western Union money order and prepaid services available through a network of third-party agents. The market cap of Western Union is $8.29B with institutional ownership being around 90%. For the fiscal year ending 31st December 2012, the company had a revenue of $5.66B with the net income being $1.026B (net profit margin of 18.11%). Corresponding figures for 2009 were $2.08B and $533M respectively indicating robust increase of 11% and 20% in revenue and net income, with margin expansion. The P/E multiple is 8.63 and P/B ratio is 8.86. Current dividend yield is 3.43% and the payout ratio is 25%. 5 year average yield is around 1.7% and the company has been paying dividends since 2006. The stock has fallen around 17% over the last year and the PEG ratio (5 year estimate) is a comfortable 0.97.

Western Union Stock Price Graph
It may be noted that while Automatic Data Processing and Paychex are nearly zero debt companies, Western Union has a significantly high D/E ratio, mainly due to the nature of its business. Considering the earnings growth over the last few years, optimum payout ratio, and the time-tested track record of dividend payments, ADP appears to be a better investment option for regular dividend income. However, it is difficult to ignore Paychex as it has better profit margins and healthy current yields. Western Union scores on the valuation front and low PEG ratio, leaving scope for capital appreciation alongwith dividend growth. The recent fall in stock price of Western Union provides an opportunity to own a high yielding, fundamentally strong stock of a company with tremendous brand strength.


Stock name Dividend Yield
Western Union 3.45
Paychex 2.99
Adp 2.14

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