Bullish Jobs Data Could Boost Paychex's Prospects


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Job growth isn't just good news for the economy. Payroll services providers such asPaychex ( PAYX ) stand to gain as companies expand and hire more workers.

Friday's news that employers added a higher-than-expected 175,000 jobs in February could mean more business for the Rochester, N.Y.-based company, which also handles human resources and employee benefits for some 570,000 small and midsize U.S. companies.

The U.S. job market directly affects Paychex, so low job growth and high unemployment can result in tough times. Its annual earnings-per-share growth streak skidded to a halt in fiscal 2009 and 2010, as the economy fell into recession amid the financial crisis.

But it's been back on the growth track since, with analysts expecting a 6% gain for the fiscal year ending in May and 8% next year.

Paychex's three-year EPS growth rate is 6%, as is its sales growth rate for the same period. Its three-year Earnings Stability Factor of 1, on a scale of 0 (most stable) to 99 (most volatile), reflects that slow but steady growth.

The company carries no long-term debt, and return on equity -- which measures how well management uses its capital -- was 34.6% in 2013. That's well above the 17% minimum threshold investors should seek.

Its quarterly dividend payout has trended higher over the past two decades, from 3 cents a share in 1989 up to 31 cents by mid-2008. But when the U.S. fell into recession in 2008 and '09, Paychex halted increases until October 2011, though it continued paying a dividend.

It now pays out a quarterly 35 cents a share, or $1.40 a year, for an annualized yield of 3.3%. That compares with the S&P 500's average yield of 1.87%.

The stock rose 46% last year, outperforming the S&P 500's 30% gain, before pausing to start working on a potential base. It's trying to climb back above its 10-week moving average and is 8% off its Jan. 7 intraday high.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Personal Finance , Investing Ideas

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