Paycom Earnings: Laser Focus on Payroll Automation Continues To Attract Clients, Shares Look Cheap

We maintain our $388 fair value estimate for narrow-moat Paycom PAYC following a strong start to fiscal 2023. The firm posted another impressive quarter with new client wins, greater module attachment, and a continued shift upmarket driving revenue growth of 28% year on year. Paycom continues to benefit from a greater contribution from ultra-high margin interest income revenue, however, this was offset by elevated investment in product innovation and marketing to attract new clients and support global expansion, resulting in broadly flat operating margins year on year.

Following the strong quarter, we have marginally lifted our full-year revenue growth forecast to 25%, in line with updated guidance and up from 23% previously. However, we maintain our operating margin forecast of 28%, up 90 basis points on the prior year, as we expect improved top-line growth to be reinvested to support growth initiatives. Our long-term outlook remains intact, and at current prices, Paycom shares trade at an attractive 25% discount to our valuation.

Paycom intends to commence a dividend payment from mid-2023, which we view as reasonable given the firm’s healthy free cash flow generation. The dividend policy will run alongside an ongoing share repurchase program, which is prudent given the sizable discount to our valuation at present, while leaving Paycom with ample scope to execute on internal investment opportunities. The firm intends to pay a quarterly cash dividend at an annual rate of $1.50 per share from June 2023. From 2024, we assume a dividend payout ratio of 20% of diluted earnings per share, implying a 2024 dividend yield of 0.4%.