Facebook
Twitter
Shares of human resources services provider Paychex Inc. (NASDAQ: PAYX) rose 3.5% on Wednesday after the company reported better-than-expected fiscal first-quarter earnings.
Paychex provides payroll, human resources, insurance and benefits outsourcing solutions for small- to medium-sized businesses. Consequently, the company’s profits are highly dependent on a robust job market. As the employment rate has fallen in the United States to pre-recession levels, Paychex has been a primary beneficiary.
Processing Higher Sales and Profit
For the fiscal first-quarter, Paychex earned $209.1 million, or $0.58 per share, on $732 million of revenue. Revenue and earnings per share grew 8% and 23%, respectively, year-over-year.
These results handily beat expectations. Analysts had projected Paychex to earn $0.51 per share on $718 million of revenue, according to forecasts compiled by FactSet. The two areas that helped Paychex beat expectations were its payroll service and human resource service businesses, which grew revenue by 5% and 15%, respectively.
The growth in payroll services was thanks to growth in revenue per check, due to price increases, as well as growth in the company’s overall client base.
With regard to the human resource business, growth was led by increases in clients and client work-site employees served. In addition, Paychex’s insurance services revenue benefited from continued growth of full-service products assisting clients with health care reform.
Overall, Paychex is in sound financial condition. The company now holds $953 million in cash and total corporate investments, with no debt. It has a very clean balance sheet.
Going forward, it’s a good sign that the U.S. economy and labor market continue to improve. Because of this, Paychex expects 4%-5% revenue growth in its payroll service business, and 10%-13% revenue growth in its human resource service segment. According to the company, this should result in 8%-9% growth in full-year net profit.
Another reason to expect continued earnings growth for Paychex in future quarters is because of its aggressive share repurchase program. Last year, the board of directors approved a $350 million share buyback authorization that extends until May 2017. During the first quarter, Paychex repurchased 1.3 million shares of common stock for a total of $62.9 million.
Paychex, Please?
Paychex isn’t the cheapest stock out there. Paychex shares trade for about 25 times trailing earnings and 21 times forward EPS estimates. These multiples are higher than the market average in both cases. Furthermore, the stock looks fairly expensive on a number of traditional valuation metrics. It trades for more than 6 times sales and 9 times book value.
That being said, Paychex could still be an attractive pick for income investors. The stock pays a solid 3.5% dividend, which is well ahead of the average market dividend yield. And the company has increased its dividend by 6% compounded annually over the past five years, which is well ahead of inflation. This includes its solid 10% raise last quarter.
Plus, Paychex could achieve enough earnings growth to justify its relatively lofty valuation. The company expects moderate revenue growth this year, which in addition to its aggressive share buybacks should result in strong earnings growth.
As a result, while value investors may shy away from the stock, investors looking for significant income should view Paychex positively, in light of its high yield and dividend growth.
Collect Dividend Income Every Month!
We’ve put together a simple calendar that pulls together all the market’s best dividends into a single, easy-to-read document. One look, and you’ll be able to set up a 12-month dividend stream for regular income every month.