This Stock Has Both Dividend and Growth Potential

Posted: Dec 22, 2011 12:01 AM

Paychex Inc. (PAYX, $30.24) reported its second quarter 2012 earnings on Dec. 20, 2011.  ”The company has now beaten estimates the last two quarters.  PAYX beat the mean analyst estimate of 38 cents per share. It fell short of the average revenue estimate of $551.7 million.  In the first quarter, it topped expectations with net income of 41 cents versus a mean estimate of net income of 38 cents per share,” says in Paychex Inc. Earnings Cheat Sheet: Third Straight Quarter of Rising Profit, December 20, 2011.

Paychex Inc.  is a leading provider of payroll processing, human resources and benefits services.

“At the end of FY 11 (May), 99% of the company’s clients were businesses of fewer than 100 employees.  Its biggest competitors are active in all business sizes.  Indicators of health in this market have traditionally been employment rates, since the revenue generated from customers is generally tied to the number of employees, and interest rates, due to interest generated on funds held, before being paid to the taxing authorities or the client employees.”

“The company has said it is making a more aggressive move into the human resources and benefits area.  The human resources business provides higher revenues per employee and wider margins than traditional payroll outsourcing.” — Standard and Poor’s Research, December 17, 2011.

Paychex is turning into a growth story.  Earnings per share (EPS) from the last five years bounced around between $1.32 and $1.56 — solidly profitable, but lacking consistent growth.  But if you take the five-year segment from 2010 through 2014, actual and projected consensus EPS look like this: $1.32, $1.42, $1.51, $1.63, $1.80.

Annual revenues have been in a tight range of $2.0-$2.1 billion for the last four fiscal years. “We look for total revenue growth of 6.0% in FY 12 (May), and expect an improvement to 7.0% in FY 13.  We see company benefiting from an improving pricing environment, slowly rising levels of checks per client, and additional clients from two recent acquisitions. We view the balance sheet as strong, with no debt and over $485 million in cash and corporate investments. ” – Standard & Poor’s Research, December 17, 2011.

To be sure, this revenue growth is slow, but combined with the 4.2% dividend yield and the EPS growth, Paychex is an attractive stock for growth & income investors.  Paychex stock has a 4-Star Buy rating from S&P and a 12-month target price of $33.00. The price earnings ratio (PE) is 20.0, which is a little higher than I would like on a slow-growth company, but the ten-year PE range has been between 15 and 70.  In that context, I wouldn’t worry about a PE of 20.

PAYX has spent a decade trading up and down between $22 and $45.  While the stock hasn’t recovered very much from the 2008 Financial Meltdown, it has traded very solidly in the $25 to $33 area for 2.5 years.

If the stock market remains in a trading range or improves in the near future, PAYX could pretty easily climb back to $33 where it traded often in early 2011.  If I were an opportunist looking for a bargain price, I’d put in a buy order at $28.75 and see if the market brought Paychex to my doorstep.

There are no indications that this stock would appeal to traders who want more than 10% short-term, growth or aggressive growth investors.  Such investors can look to my website for other investment ideas, and any reader may sign up for the free one-month subscription at Goodfellow LLC.

Also see: 5 Stocks to Buy for a Santa Claus, December 19, 2011

Happy investing!

Crista Huff

Goodfellow LLC