The Books Check Out for Paychex

01/18/2012 7:30 am EST

Focus: STOCKS

This payroll, human resources, and benefits-outsourcing company is doing well and boosting its dividend, writes Marc Johnson of The Investment Reporter.

Paychex (PAYX) did reasonably well in the first half of fiscal 2012. Particularly in light of a slow economic recovery. It remains a buy for long-term share price gains and dividends that are rising once again.

In the six months to November 30, Paychex earned $289 million, or 80 cents a share. That’s up by 9.6% from earnings of $266 million, or 73 cents a share, a year earlier. Revenue rose more than costs—partly due to acquisition.

For all fiscal 2012, Paychex is expected to earn $1.51 a share, up by 6.3%. Next year, its earnings are expected to rise by another 7.3% to $1.62. The technical outlook has also improved. The share price is above the 50-day moving average, which, in turn, has just moved above the 200-day moving average.

In the first six months, Paychex’s payroll revenue rose by 5.4% to $754 million (68% of total revenue). Checks per client increased by 1.8%. (Without the acquisition of SurePayroll in last year’s second half, the payroll division’s revenue would’ve risen by only 4%.)

HR Revenue Rising Fastest
In the first six months, Paychex’s human resources revenue jumped by 14.6% to $333 million (30% of total revenue).

We expect record keeping for pension plans to grow in importance as more employees invest towards their retirements. Exclude the acquisition of ePlan in last year’s second half, and human resource revenue would’ve gone up by only 12%.

In the first six months, Paychex’s interest on funds held for clients fell by 9.5% to $21.8 million (2% of total revenue). While cash balances increased, the drop in interest rates reduced revenue even more.

In the first six months, Paychex’s total revenue increased by 7.6% to $1.1 billion. Fortunately, the company managed to keep a lid on its costs. Total expenses increased by a lower 5.7% to $661 million. As a result, Paychex’s income before income taxes grew by 10.5%. Then again, a 13.8% jump in income taxes restrained Paychex’s net earnings growth to 9.6%.

In the first six months, Paychex’s cash flow climbed by 12.4% to $393.3 million. This greatly exceeded capital spending of $45.1 million and dividend payments of $228.4 million.

Back to Raising Dividends
The hefty dividend payments are little surprise. After all, officers and directors own 10.9% of the company. So as shareholders they, too, benefit from higher dividend payments.

Paychex raised its dividend for many years. But in the previous three years, it merely maintained the dividend at $1.24 a share. Now the company has resumed increases. The current dividend of $1.28 a share yields an attractive 4.1%.

Paychex remains a buy for long-term gains and dividends that have resumed rising.

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