Does Bill Miller Think Paychex Is Attractive?

Bill Miller seems befuddled. In his July 2010 commentary, he wonders why investors keep purchasing 10-year Treasuries yielding about 3%, when companies like ExxonMobil offer much higher potential returns.

His formula for Exxon is straightforward: "A sum of the dividend yield, growth rate and share shrink could represent an attractive annual return even if the valuation stays the same, and the valuation is among the lowest the company has traded at in years." When you add up the components, Exxon could offer 16.4% returns per year in a low-return environment.

I'm no less baffled than Miller by investors' preference for bonds, but I do think he's on to something. To see whether more Miller-like opportunities like Exxon were out there, I looked for companies with:

• A dividend yield greater than the 3% 10-year Treasury yield.
• A five-year track record of dividend growth.
• A history of repurchasing shares.
• A price-to-earnings ratio less than 25.

Here's what I found:

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

From the table above, Paychex fits Miller's criteria perfectly. It pays a 4.9% dividend that has been growing 19.4%, on average, for the past five years. The company also trades at just over 19 times earnings and produces plenty of cash flow to repurchase shares. Competitors CBIZ and Hewitt Associates have been buying back shares and trade at reasonable P/E multiples, but neither pays a dividend yet.

Foolish bottom line
Would Bill Miller consider investing in Paychex? It meets all the criteria above, and it could offer a 24.3% return over time -- although it will be hard for the company to maintain such a dividend growth rate. In today's low-return environment, that's pretty attractive. I don't know why the market is offering up this opportunity, but as long as it is, Paychex could be worth pursuing further.