Stocks for the Long Run: Paychex vs. the S&P 500

Investing isn't easy. Even Warren Buffett counsels that most investors should invest in a low-cost index like the S&P 500. That way, "you'll be buying into a wonderful industry, which in effect is all of American industry," he says.

But there are, of course, companies whose long-term fortunes differ substantially from the index. In this series, we look at how individual stocks have performed against the broad S&P 500. 

Step on up, Paychex (Nasdaq: PAYX  ) .

Paychex shares have simply crushed the S&P 500 over the past quarter-century:

Source: S&P Capital IQ.

Since 1987, shares have returned an average of 18.6% a year, compared with 9.7% a year for the S&P (both include dividends). That difference adds up fast. One thousand dollars invested in the S&P in 1987 would be worth $19,200 today. In Paychex, it'd be worth $236,780. 

Dividends accounted for a lot of those gains. Compounded since 1987, dividends have made up about half of Paychex's total returns. For the S&P, dividends account for 39% of total returns.

Now have a look at how Paychex earnings compare with S&P 500 earnings:

Source: S&P Capital IQ.

Again, huge outperformance. Since 1995, earnings per share have increased by an average of 17.3% per year, compared with 6% annual growth for the broader index.

What's that meant for valuations? Paychex has traded for an average of 49 times earnings since 1987 -- well above the 24 times earnings average of the S&P 500. It's far different today, however. Paychex currently trades for about 19 times earnings.

Through it all, shares have been strong performers over the last quarter-century.  

Of course, the important question is whether that will continue. That's where you come in. Our CAPS community currently ranks Paychex with a four-star rating (out of five). Do you disagree? Leave your thoughts in the comment section below, or add Paychex to My Watchlist.

Fool contributor Morgan Housel owns shares of Paychex. Follow him on Twitter, @TMFHousel. Motley Fool newsletter services have recommended creating a write covered straddle position in Paychex. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


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