Income and growth in a single stock - you can find it in Paychex (NASDAQ:PAYX). If you are looking for a solid company with a stable, healthy dividend and a catalyst for future growth, this provider of payroll services to small- and medium-sized businesses is a good candidate.
A Solid Company With Good Fundamentals
Paychex is a large-cap ($3.53 billion) company that provides payroll processing, administration, human resources, and payroll tax preparation services to companies in the United States and Germany. In its most recent quarter (despite an economy one might charitably describe as tepid) it reported earnings per share up 8.1% over the previous quarter, growth in top line revenue, growth in net income, and expanding profit margins. The stock has also performed well this year against its peers and against the S&P 500, and is up 19% year to date.
Paychex pays an annual dividend of $1.32 per share with a yield of 3.6%. In a large-cap company with a long history of paying and sustaining a significant dividend, this 3.6% yield is stable and by itself justifies consideration of the company for a place in an income portfolio. But Paychex is more than just its healthy dividend.
Catalysts for Growth
As a provider of payroll services to small- and mid-sized employers, Paychex's fortunes are strongly impacted by hiring and employment. To say the economy, and the job market, have struggled recently is an obvious understatement. And yet, in this difficult environment Paychex has still managed to grow both its top and bottom lines, and increase its earnings per share. This strong performance is likely to accelerate if either one of two possible scenarios develop.
First, if recent signs of increased hiring in the private sector continue and the unemployment rate drops, Paychex is a likely beneficiary as the small- and mid-sized businesses that drive the economy will require more services. A strengthening employment picture creates a virtuous loop for Paychex - where more hiring feeds the economy, more people can pay for and consume goods and services, and the increased hiring increases demand for the services Paychex provides.
Second, it's no secret that employers (particularly small employers) have been saying they are reluctant to hire more workers because of uncertainty over "Obamacare" and what it will cost them to comply. As employers navigate these issues over the balance of this year and 2014, this uncertainty will ultimately give way to clarity as the system gets put into place. When these issues clear, hiring and the economy are much more likely to be on a more firm footing and again Paychex will benefit.
If neither of the above two catalysts occur - and hiring and the economy continue to struggle as they are now, Paychex has shown that it can still grow and perform well in this poor environment. And while you wait to see if the economy and hiring gain traction as hoped, you earn a nice 3.6% dividend.
Paychex is not cheap. With its current year-to-date run of 19% it is priced at 37.18 and has a PE of 23.22 versus the S&P PE of 18.
Disclosure: I am long PAYX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.