Paychex's Dividend Safety Affirmed Amid Debt-Funded Acquisition

What happened

Paychex has declared a quarterly dividend of $1.08 per share, offering a 3.65% yield. This follows the company's $4.2 billion debt issuance to finance the Paycor acquisition completed in April 2025. The DeepValue report notes that leverage metrics such as interest coverage of 13.43x and net debt/EBITDA of 1.36x remain manageable post-acquisition. However, the report cautions that shares trade at a rich P/E of ~24, above intrinsic value, with integration risks from Paycor still looming. Despite these concerns, improved retention metrics and solid free cash flow support the dividend's sustainability.

Implication

Paychex's strong free cash flow and healthy coverage ratios underpin its ability to service debt and maintain dividends. Investors should recognize that the increased leverage from the Paycor deal is within manageable bounds, reducing near-term financial stress. The stock's premium valuation, trading 41.8% above intrinsic value, limits margin of safety and potential returns. Successful integration of Paycor could drive future growth through upmarket expansion and cross-selling, but any missteps may erode confidence. Therefore, monitoring retention metrics and synergy realization is crucial before considering a position change.

Thesis delta

The news reinforces the existing thesis that Paychex's dividend is supported by solid fundamentals, but it does not address the overvaluation concerns highlighted in the report. No significant shift in the investment case is warranted; the HOLD recommendation remains appropriate as risks and rewards are balanced.