The Perfect Stock To Own In This Job Market
Robust job creation and rising take-home pay are good for just about every business (except maybe pawn shops and loan sharks). But this company benefits more than most…
In fact, that’s what led us to recommend this stock to our Daily Paycheck subscribers back in 2012. And all it’s done since then is reward readers with one of the fastest-growing dividends you’ll find in the market — and a total return of 253% at last count.
Paychex (Nasdaq: PAYX) handles the payroll for 650,000 clients, mostly small businesses with 10 to 50 employees — the economy’s growth engine.
These payroll customers generally pay a flat service fee, as well as an additional fee for each worker enrolled. Thus, Paychex likes to see businesses hiring new employees. And after a soft February report, the labor market is roaring once again.
There were 196,000 new jobs created in March, about 20,000 more than expected. Meanwhile, the number of unemployment claims fell to the lowest level since 1969 (and the workforce is much larger today than it was 50 years ago).
#-ad_banner-#Payroll administration is a lucrative business. Paychex produced $1.1 billion in revenues last quarter, a healthy increase of 14%. Half of that growth came organically, while the other half came from the acquisition of Oasis Outsourcing. That purchase bolsters Paychex’s burgeoning suite of outsourced HR functions (workers comp, health insurance, 401(K) record keeping and other ancillary products).
While smaller, this division is growing far more rapidly (65% last quarter versus 4% for the core management solutions segment). It has helped drive earnings up 12% year-to-date to $2.21 per share.
And national payroll expansion isn’t the only tailwind. Paychex is also one of the few companies cheering rising interest rates. There is a lag time between when it collects money from clients and when the funds are disbursed to employees at their next paycheck. During that time, it deposits the cash in safe, interest-bearing instruments.
The interest adds up faster than you think. Paychex has approximately $4.4 billion in funds held for clients. And that cash is now earning about 2.1%, up from 1.6% a year ago. As a result, interest income rose 27% last quarter to $23 million.
The next uptick in rates (or wages) will push annualized interest income past the $100 million mark — not bad for a side business.
Action to Take
PAYX has been on a nice run, delivering a total return of 34% over the past year, versus a peer group average of 22%.
But that run has stretched valuations, leaving the stock trading above its historical price/earnings and price/cash-flow ratios. Therefore, I’m telling my Daily Paycheck readers to “hold” at these price levels. After all, with a 253% gain on the books, we don’t want to get greedy. Instead, we’ll keep reinvesting those growing dividends and growing our own “paychecks”. But if you’re left feeling like you’ve missed out, then I wouldn’t blame you for taking another look at this one.
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