A Member of Pat McKeough’s Inner Circle recently asked for his advice on Paychex, a leading provider of comprehensive human capital management solutions which serves nearly 800,000 clients ranging from small businesses to large enterprises across the U.S. and Europe.
Pat likes the dividend stability and the transformative Paycor acquisition with the firm’s mission-critical (and now AI-boosted) payroll services creating tremendous customer stickiness with 90%+ retention rates. However, Pat notes the company faces intense competition in its industry.
PAYCHEX INC. (Symbol PAYX on Nasdaq) is an industry-leading human capital management (HCM) company. It provides a range of human resources and payroll services, including accounting, salary deposits, and automatic tax payment and filing.
The company’s approximately 800,000 clients are mostly small and medium-sized businesses (10 to 200 employees) throughout the U.S. and Europe. Paychex, in fact, processes the paycheques for one out of every 12 American private-sector employees.
Paychex specializes in helping businesses that lack the resources or expertise to adapt to constantly changing HR and payroll conditions.
Paychex operates through three segments: Management Solutions, Professional Employer Organization (PEO) and Insurance Solutions, and Interest on funds held for clients.
Management Solutions offers payroll processing solutions that include the preparation and delivery of employee payroll checks. Other services include payroll tax administration, employee payment, human resources, retirement, regulatory compliance, and other solutions. Revenue from Management Solutions makes up about 73% of Paychex’s revenue.
The PEO and Insurance Solutions segment has two revenue streams. Its PEO subsidiaries offer businesses a combined package that includes payroll, employer compliance, HR, and other solutions. Insurance Solutions provide insurance through a variety of carriers. This lets employers expand their employee benefits and corporate offerings at an affordable cost.
This segment makes up 24% of Paychex’s total revenue.
The Interest on funds held for clients segment invests in marketable securities. Paychex earns interest on those funds. This segment accounted for around 3% of revenue.
On April 14, 2025, Paychex completed its acquisition of Paycor HCM, Inc. for $4.1 billion. Paycor is a leading provider of HCM, payroll and talent software. The company has over 49,000 clients, and supports about 2.7 million employees across the U.S.
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Paycor serves organizations of all sizes, from ten to thousands of employees. It has expanded its upmarket, or larger company, position since becoming a public company in 2021. It has done this through investing in data analytics, artificial intelligence, and other cutting-edge technologies.
In May, Paychex announced that its founder Tom Golisano would step down from the board after the completion of its July 2025 meeting. Golisano served as Chairman until 2021.
Paychex gains from increasing workplace complexity
In the three months ended May 31, 2025, Paychex’s revenue rose 10.2%, to $1.43 billion from $1.30 billion a year earlier. Revenue increased due to the acquisition of Paycor, along with a 3% rise in Management Solutions revenue, and 4% for its PEO and Insurance Solutions business.
Excluding one-time items, Paychex earned $576.7 million, or $1.19 a share, in the latest quarter. That was up 10.6% from $521.3 million, or $1.12 a share. Due to more shares outstanding, its earnings per share increased by a slower rate of 6.3%.
Paychex raised its quarterly dividend by 10.2% with the May 2025 payment, to $1.08 a share from $0.98. The stock yields 3.4%.
Paycor should be a good fit for Paychex. It will expand its customer base to include more large corporations. Paycor will also broaden its AI-driven HR technology expertise.
Paychex continues to benefit from the increasing complexity and challenges businesses face in managing their workforces. Regulations are continuously evolving and becoming more complex. Hybrid work has become more common. Healthcare and benefit costs are rising.
Paychex aims to tap into these trends through its broad offerings that help companies navigate these challenges. The company gains as small businesses outsource their payroll, human resources and insurance needs.
Meanwhile, the shares trade at a somewhat high 23.6 times forecast 2025 earnings of $5.46 a share.
Recommendation in Pat’s Inner Circle: Paychex Inc. is okay to hold.
