Paychex: Strong Brand, Profitable Operations, Generous Dividend Yield

| About: Paychex, Inc. (PAYX)

Paychex (NASDAQ:PAYX) is a leading provider of payroll, human resource and benefits outsourcing solutions for small and medium- sized businesses. The company offers comprehensive payroll services, including payroll processing, payroll tax administration and employee pay services, including direct deposit, check signing and Readychex. Human Resource Services include 401(k) plan recordkeeping, time and attendance solutions and other administrative services for businesses. A variety of insurance products are also made available through Paychex Insurance Agency.

Strong Brand

In 1971,B.Thomas Golisano started Paychex with just $3,000, one employee and a great idea—to make payroll ou tsourcing easy and affordable for small businesses. Today, Paychex boasts $2 billion in revenue and offers an ever-growing variety of payroll and human resource products from calculating payroll and filing tax payments to administering retirement plans and worker compensation.

Mr. Golisano continues to serve as Paychex’s chairman of the board and is the company’s largest shareholder, owning 10.5% of the company’s stock. Martin Mucci was recently named the company’s third president and CEO in the company’s 40-year history after serving as the company’s senior vice president of operations since 2002.

With a strong brand, Paychex has more than 100 offices nationwide and serves approximately 536,000 payroll clients. The company’s average client has 17 employees. Payroll processing is the bedrock of the company’s business and will continue to be so in the future. There are over 11 million businesses in the markets Paychex serves with only a 15% penetration rate by the industry—providing plenty of future growth opportunities.

The company also is focusing on selling complimentary services to its payroll clients in all markets with growth rates in human resource services outpacing payroll growth.

With over $11 billion in assets and 51,000 clients, Paychex continues to be a leader in 401(k) recordkeeping by servicing one in every ten 401(k) plans in the country. Paychex is also rapidly expanding the insurance services it offers, including business owner, property and casualty and health and benefits. Nearly 100,000 small businesses use Paychex for their insurance needs.

Profitable Business

Turbulent economic times and high unemployment have proven challenging for Paychex’s operations in recent years as many small businesses have struggled. In addition, low interest rates negatively impact the investment income earned on funds held for clients and corporate investments. As a result, the company’s sales have flat-lined over the last three years with earnings growing backwards.

While management remains cautious on fiscal 2011, first quarter results were encouraging. Total revenues increased 4% to $518 million with net income increasing 7% to $132 million due to modest improvements in economic conditions and annual price increases. Despite difficult business conditions, Paychex’s operations remain highly profitable. Excellent net profit margins have averaged more than 26% over the last five years, which have contributed to the company’s outstandin g 35% r eturn on shareholders’ equity averaged over the same period.

These high returns are even more impressive when one considers that the company operates with a cash-rich and debt-free balance sheet. As of 8-31-10, the company boasted more than $700 million in corporate cash and investments and no long-term debt.

Generous Dividend Yield

With minimal capital expenditure needs, the company generates bountiful free cash flows which have averaged more than $600 million annually over the last three years despite the challenging economic environment. Paychex has returned most of this cash to shareholders by repurchasing $1 billion of its stock in 2008 and paying close to $450 million in dividends annually over the last three years.

The stock dividend currently yields a generous 4.5%, and management remains intent on maintaining its strong dividend policy. Long-term investors should consider picking up a paycheck from Paychex, a HI-quality company with a strong brand, profitable operations and a generous dividend yield.

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