PayChex (PAYX) and the coming Small Business Boom

PayChex (PAYX) is geared heavily to the small business sector, which has been hit hard over the past few years. Regardless, the company yields 4.3% in dividends and is well positioned for the coming bounce back of the sector.

The small business sector is being talked up by the US government as a key sector for the economy going forward. Investors looking to benefit from this sector and enjoy a healthy dividend might want to consider PayChex (PAYX) for their portfolio. The company trades on a dividend yield of 4.3%.
 
Founded in 1971, PayChex (PAYX) is a leading provider of payroll, human resource, and benefits outsourcing solutions for small- to medium-sized businesses with a user base of over 500,000.
 
When the company reported third quarter earnings in March 2010, revenue came in at $507.8 million while operating income decreased 15% to $168.2 million. Net income and diluted earnings per share decreased 14% to $112 million and $0.31 per share, respectively. The company results were impacted by a once-off $18.7 million expense charge after losing a 2007 court case. Apart from this the results were in-line with expectations. Cash flow from operations was a very healthy $503 million.
 
Commenting on the results, Jonathan J. Judge, President and Chief Executive Officer said: “Continued investment in our business, including our technological infrastructure, is critical to our success. We have invested over $60 million in an enhanced platform for our core payroll processing capability that was fully implemented by the end of our third quarter. We have successfully completed our conversion of over 470,000 clients to this platform, which allows us to leverage efficiencies in the process and continue to provide extraordinary customer service for our clients."
 
The company also holds funds on behalf of clients and therefore has been negatively impacted by low real interest rates. With interest rates expected to rise in late 2010 or early 2011, the company could enjoy a positive boost.
 
When the company announced an increase in dividend and a stock repurchase program in 2007, Judge made a commitment to shareholders: "Paychex (PAYX) has a long tradition of providing our shareholders with a great return on their investment. Our history of increasing shareholder value is evident in our annual cash dividend payments". Management “speak” but the record does speak for itself.
 
This commitment to shareholders and exposure to a segment of the economy which is expected to benefit from high levels of government support could provide a good environment for divided seeking investors to buy shares in PayChex (PAYX).
 
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