BERKO: Tax reform vs. simplification
Friday, June 01, 2012 7:00 AM
Dear Mr. Berko:
I’m 51 and make a good living as a self-employed professional. I employ four people, including my wife, and have been doing my personal/business tax returns for 28 years. This year was the last straw. I actually began to revel in radical, subversive fantasies directed at the IRS and members of Congress. But my wife returned me to sanity, and I hired a CPA, who filed an extension and charged me $4,200 to complete my return. Other taxpayers will also tell you that preparing these forms is a nightmare, and many are even more offended that I am. Thanks for letting me rant. I know this is a rhetorical question, but will we ever have meaningful TAX REFORM? My wife thinks I should send this to my congressman. Now could you please share your thoughts on Paychex? Is this a stock you would recommend for a long-term investment in a retirement plan?
R.S., Gainesville, Fla.
Wow, a very well-written two-page rant. Don’t bother sending it to your congressperson, who’s too busy seeking re-election funds from the scofflaws who profit by the complexity of the tax code. We will always have tax reform, but I doubt we will ever have tax simplification.
Tax reform is the bailiwick of skilled lobbyists, who tell members of Congress to vote in favor of paying special-interest groups. The only changes here are the “givers and takers.”
However, tax simplification reduces the complexity of tax laws so a next-door neighbor or an NBA forward can do a return in 60 minutes. Tax simplification is unlikely because powerful and heavily vested interest groups (tax-form printers, ink and paper producers, colleges providing degrees in taxation, tax lawyers, IRS employees, textbook companies, tax manual publishers, tax preparation companies, lobbyists, CPAs, business stationers, etc.) will suffer irreparable income losses.
Paychex Inc. (PAYX-$29.94) is a $2.2 billion revenue computerized accounting firm providing automatic payroll tax services, salary deposit services, tax return preparation services, plus myriad accounting resources to 600,000 small and medium-sized businesses. PAYX employs 12,000 people via 103 offices in the U.S. and abroad.
Since 2001, the stock trucked between the mid-$40s to the low $20s and has been undependable for those seeking stable appreciation. However, PAYX has been an attractive and consistent revenue, earnings and dividend producer. Revenues and earnings faltered modestly during the 2008-2010 recession, but the dividend, which increased to $1.24, did not falter. This year, PAYX’s per-share earnings should exceed $1.50 and the dividend has been raised to $1.28. The top line, with the acquisitions of SurePayroll and ePlan, plus an enhanced Internet technology, should continue to grow at a respectable 7 percent rate. Client retention is excellent, and management has been able to implement small but meaningful price increases.
So results for 2012 and 2013 should benefit nicely from new business formations and an improving job market. Revenues from the company’s human resources division are growing at double-digit rates, reflecting strong demand for health and retirement services offerings. PAYX yields a healthy 4.3 percent, and revenue, earnings and dividend growth over the coming 10 years should be strong. But I think PAYX will move lower and recommend that you place an Open, Stop, DNR order to buy it at $26. And when you buy the shares, please remember to reinvest its growing dividend that could reasonably exceed $2.50 a share by 2022. At $25, this could be an uncommonly sweet, long-term income/growth investment for your retirement plan.
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