“Paychex, Inc. (PAYX) is a leading provider of payroll, human resource and benefits outsourcing solutions for small and medium-sized businesses. With a strong brand, Paychex has more than 100 offices nationwide and serves more than 564,000 payroll clients. The company’s average client has 17 employees. Payroll processing is the bedrock of the company’s business and will continue to be so in the future. There are over 11 million businesses in the markets Paychex serves, with only a 15% penetration rate by the industry—providing plenty of future growth opportunities.
“The company also is focusing on selling complimentary services to its payroll clients in all markets, with growth rates in human resource services outpacing payroll growth. Turbulent economic times and high unemployment have proven challenging for Paychex’s operations in recent years as many small businesses have struggled, although business trends are now improving. Management reaffirmed its guidance for fiscal 2012 with revenues growing in the range of 7%-9% and earnings growing in the range of 5%-7%. Despite difficult business conditions, Paychex’s operations remain highly profitable. Excellent net profit margins have averaged more than 26% over the last five years, which have contributed to the company’s outstanding 35% average return on shareholders’ equity over the same period. These high returns are even more impressive when one considers that the company operates with a cash-rich and debt-free balance sheet. With minimal capital expenditure needs, the company generates bountiful free cash flows. Paychex has returned most of this cash to shareholders through share repurchases and dividends. The stock dividend currently yields a generous 4.3%, and management remains intent on maintaining its strong dividend policy with a target of paying out 80% of earnings. Long-term investors should consider picking up a paycheck from Paychex, a HI- quality company with a strong brand, profitable operations and a generous dividend yield. Buy.”
Ingrid R. Hendershot, CFA, Hendershot Investments, January 2012
