Paychex (NASDAQ:PAYX) 3% Yield Is A Risk I Can Handle

Paychex Is A Diversified Play On Economic Recovery

Paychex, Inc (NASDAQ:PAYX) s a cloud-based HR, financial, and insurance services firm serving small and mid-cap businesses. Don’t think that the labor market is struggling because you heard that job growth slowed. The labor market took a big hit when we shut the government down but is showing remarkable resilience now. Even with job growth slowing in September, the number of jobs created was still well-above any previous record. What that in mind, this company is an interesting play on the labor market as it pays a 3.0% yield and garners exposure to tech, the cloud, and the need for businesses to incorporate social-distancing in their operations

The only downside to the stock, from the business perspective, is the focus on small and medium-sized businesses. It is the small and medium-sized businesses that are most vulnerable to economic disruption but for now, that’s just a worry. The ADP labor market report shows hiring has been broad-based by business size since the market bottom.

Paychex Beats Consensus, Guides Above The Midpoint

The company was not expected to report a great quarter and it didn’t.Net revenue fell on a year-over-year basis and is expected to remain negative through the end of the year. What it did do was beat the consensus and provide guidance a little firmer than what the analysts had been expecting. The total revenue of $932.2 million is down -6.0%YOY but beat consensus by 500 basis points. On the bottom line, adjusted and GAAP EPS both fell from the previous year but came in positive, near the $.60 for each, and both $0.08 better than expected. Looking forward, the company is expecting full-year revenue down 2-4% compared to the consensus -3.65%.

Martin Mucci, President and Chief Executive Officer, commented, “Financial results for the first quarter showed marked improvement as most of our key business metrics recovered at a faster rate than anticipated. The effects of the COVID-19 pandemic continue to impact our results causing unfavorable year-over-year comparisons, however, client retention has remained strong and sales performance is accelerating with year-over-year growth in the number of clients sold. We continue to provide excellent customer service and invest in our business while remaining cost-conscious. Cost-saving initiatives are underway and proceeding as expected.”

Paychex Balance Sheet Is A Fortress

Paychex ended the quarter in as strong a financial position as it has been in for some time and this is a company with a fortress balance sheet. At the end of the quarter cash and cash equivalents were more than 100% of total borrowing leaving the balance sheet relatively unimpeded. And that’s not counting cash-flow or free-cash-flow. What this means for the dividend is safety despite the relatively high payout ratio. The company is expected to pay out close to 90% of earnings this year, not something I like to see, but the ratio falls next year and this company is dedicated to paying shareholders.

“We currently anticipate that cash, restricted cash, and total corporate investments as of August 31, 2020, along with projected operating cash flows and available short-term financing, will support our business operations, capital purchases, share repurchases, and dividend payments for the foreseeable future.”

The Technical Outlook: Paychex Is Breaking Out

Paychex shares have been, had been I should say, trading within a range since hitting a peak way back in June. Recent action, however, has the price moving higher in the last few trading days and breaking out of said range. The indicators are not as strong as they could be but are showing bullish signals that confirm the breakout and point to higher prices for the stock if not a robust rally. The next target is near the pre-COVID high or about 12% above the current price action and may be reached by the end of the year.