Is Paychex's Management Up to the Task?

Big investors like Warren Buffett have the clout, time, and resources to evaluate a potential investment's management face to face. You may not have quite such a mighty address book, but that shouldn't stop you from assessing the people in the executive suites.

When sizing up management's mettle, I always start with two simple measures: ownership and returns on invested capital. I want to know whether management has skin in the game, aligning its interests with mine. And I want to learn how well executives have allocated shareholders' hard-earned capital. If management owns a significant stake in the company, and can generate value-creating returns on invested capital, I call that a win-win!

Recently, Paychex (Nasdaq: PAYX  ) and its management team caught my eye. The table below will tell you why:

Company

Insider Ownership

ROIC

Paychex Inc.

10.7%

39.8%

CBIZ, Inc. (NYSE: CBZ  )

28.6%

6.8%

Fiserv, Inc. (Nasdaq: FISV  )

1.9%

8.3%

Source: Capital IQ, a division of Standard & Poor's, and author calculations.

Insiders own 11% of the shares outstanding, and returns on invested capital have consistently exceeded 15%. Since the cost of capital for most companies is between 8% and 12%, depending on their capital structure, Paychex is creating value for its shareholders.

Studies also show that competition erodes returns over time. Yet Paychex has generated those impressive returns while vying in a broader industry that includes both CBIZ and Fiserv as well as key rival ADP. That impressive achievement suggests that management knows what it's doing.

Good execs? Check!
From the data above, it certainly looks like Paychex's management has been creating value for its shareholders. Given its top-notch leadership, I'd suggest you give Paychex a spot on your Watch List.

Million Dollar Portfolio associate advisor David Meier does not own shares of any of the companies mentioned. Paychex is a Motley Fool Inside Value pick. ADP and Paychex are Motley Fool Income Investor selections. The Fool owns shares of Fiserv. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.


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  • Report this Comment On August 24, 2010, at 7:24 PM, jasonaroth wrote:

    I am not sure how you could classify Paychex, and Fiserv in the same broad industry? Why don't you show the figures for ADP who is in the same industry?

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