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Paychex (PAYX), the provider of payroll, human resource and benefits outsourcing services, announced its first quarter results on Monday after the market close. Investors reacted very timidly on the publication of the results, as shares traded largely unchanged in after hours trading.

First Quarter Results

Paychex reported first quarter revenues of $578.2 million, up 3% compared to last year. On average, analysts expected Paychex to generate revenues of $584.1 million. The company reported a 3% increase in net income to $153.1 million. Earnings per diluted share rose by 2% to $0.42 per share. Earnings beat analysts consensus by a penny.

Total expenses rose by 2% to $340.2 million. Continued investments in product development and supporting technology where offset by increased productivity.

CEO Martin Mucci commented on the results, "The first quarter has fiscal 2013 off to a good start with results meeting our expectations. Our client base continued to improve, checks per payroll continued to increase, and our client retention is near a historic high. Growth rates reflect fluctuations in the frequency of payroll processing compared to the same period last year."

Segmental Information

The company's payroll service division reported revenues of $385.9 million, up 1% on the year. The number of checks per payroll rose by 2.0% over the quarter. As a result of discounting, revenue growth was tempered.

The human resource division reported a strong 7% increase in revenues to $182.2 million. Higher checks per payroll, price increases and client growth all boosted revenue growth. Insurance revenues rose by 21% and the retirement services performed good as well.

Outlook

Paychex leaves its full year fiscal 2013 outlook unchanged. Payroll service revenue growth is expected to come in between 3 and 4%. Human resource revenues are expected to grow between 9 and 11% for the full year. Total revenues are expected to grow by 5 to 6%.

Net income is expected to increase by 5 to 7%

Valuation

Paychex ended its first quarter with $390.9 million in cash, equivalents and short term investments. The company operates without any meaningful debt, for a comfortable net cash position.

Based on the outlook, Paychex is expected to generate annual revenues of around $2.3 billion. Net income could come in around $580 million, or $1.60 per share.

Currently, the market values the firm at $12.5 billion, or $12 billion for the operating assets of the firm. This values the firm at 5.2 times annual revenues and 21 times annual earnings.

Its larger competitor Automatic Data Processing (ADP) trades at 2.7 times annual revenues and 21 times trailing earnings.

Currently, Paychex pays a quarterly dividend of $0.32 per share, for an annual dividend yield of 3.7%.

Investment Thesis

Year to date, shares of Paychex have risen some 15%. Shares traded between $29-$33 in the first half of the year, but rose to year highs of $34 at the moment.

Over the past five years, shares have fallen some 20%. Shares fell to lows of $20 in the beginning of 2009, but have traded between $25 and $35 per share, ever since. Over the same period, Paychex grew its annual revenues from $2.0 billion in 2009, to an expected $2.3 billion for its fiscal 2013. Net income grew from $533 million to an expected $580 million. Earnings per share grew in line with net income.

Investors hardly reacted on the first quarter results of Paychex as results were in line with expectations, and the company reiterated its full year outlook. Shares trade at 21 times expected annual earnings, which is a fairly steep valuation. Investors are comforted by the stable 3.7% dividend yield.

Investors could hold on to their shares. Don't expect any spectacular performance in the short term, but long term holders receive a decent yield in the meantime. The decent yield and strong financial position offers a cushion for rough times.

Source: Paychex - Stable Quarter From This High Dividend Yielder