Paychex: Stable and Reliable for the Long Term

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Paychex (NASDAQ: PAYX) is one of the leading providers of payroll services in the United States and provides human resource services and business outsourcing among its extensive portfolio of services. It currently serves more than 564,000 clients through over 100 offices and it expects to grow its base after it made two key acquisitions in the second half of its most recent fiscal year. In my opinion, we can expect great things from Paychex this year as it reaps the benefits of its acquisitions and looks forward to an economy that is beginning to show signs of life once again heading into 2012.

In December of 2010, Paychex acquired its Glenview, IL based competitor, SurePayroll for $115 million and will enjoy access to another 30,000 clients and three key financial institutions as a result. SurePayroll has relationships with Harris (HRS) owned Harris Bank, Citigroup’s (C) Citibank and Sun Trust Banks (STI) that Paychex can capitalize on as a result of the acquisition, increasing the company’s reach and ability to provide financial services to its clientele. In addition to payroll services, Paychex provides 401(k) plan record keeping, insurance products and health and workers’ compensation through its insurance subsidiary.

The acquisition of SurePayroll will also allow Paychex to strengthen its position in a rapidly growing online market, in which SurePayroll has a reach. This month, SurePayroll announced the release of its mobile paycheck Android application, which is one of four free applications it has offered in recent years to allow customers access to solutions that provide convenience and real time data through their smartphones. SurePayroll was the first payroll company to offer mobile applications to its customers with the release of its first application back in 2009.

Paychex also recently acquired ePlan Services, which serves nearly 4,000 401(k) plans and operates in all 50 states. ePlan Services will strengthen Paychex’s position as a provider of 401(k) recordkeeping services and allow it to expand the availability of 401(k) programs to its many customers. The acquisition also allows Paychex to reach out more to small businesses due to ePlan Services’ focus on providing programs that meet the unique needs of small businesses.

In December, Paychex announced total revenue of over $545 million for the quarter ending on November 30, 2011. It reported growth of 7% when compared to the same quarter in 2010 and attributed about 2% of its growth to its new acquisitions. Its total net revenue for the quarter was $140 million. In its last fiscal year, it reported total yearly net revenue of $515 million, up from $477 million in 2010.

Paychex operates much more efficiently than its closest competitors with an operating margin of just over 38%. Automatic Data Processing (NASDAQ: ADP) follows with an operating margin of 18% while Insperity (NYSE: NSP) operates with a margin of only 2.9%, diminishing the significance of its revenue growth of 13.7% when compared with Paychex’s yearly growth of 6.6% and Automatic Data Processing’s growth of 7.4%.

Paychex operates in an extremely competitive market and its closest competitors have placed added pressure on the company through recent developments. Automatic Data Processing announced recently that it has integrated its AdvancedMD's practice management solution with digiChart's electronic health record, allowing it to excel in providing cloud-integration services in the OB-GYN field. Meanwhile, Insperity released a new version of its TimeStar software in November that is compatible with Mac computers and iPhone mobile web browsers as a way to challenge SurePayroll’s mobile software. SurePayroll has a much stronger foothold in the mobile market, however, and I don’t think that Insperity will be able to provide much of a challenge in the immediate future.

Paychex increased its quarterly dividend payout of $0.31 per share to $0.32 in November and announced another payout of $0.32 per share in January. It has provided $1.28 over the last four quarters for a yield of just over 4% and I believe that it is fully capable of securing its dividend for quite some time as it continues to reap the benefit of its latest acquisitions. It also shows a strong commitment to its shareholders by paying out at a ratio of just over 0.85 and its commitment to the financial interests of its shareholders make it a great stock to look into if you are looking to diversify your portfolio further.

Over the last three years, Paychex stock has grown from $21 per share to $31 and it is currently trading over its yearly moving average of $29. I believe that it has some room for minor growth and that its dividend adds appeal to a position here by providing a reinvestment opportunity each year that gives investors compounded gains over the long term. I wouldn’t anticipate rapid gains, but I believe that Paychex is a stable and reliable stock for long term growth and a great as part of a dividend reinvestment plan.

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