Paychex, Inc. (NASDAQ:PAYX)

CAPS Rating: 4 out of 5

Paychex provides payroll, human resource, and employee benefits outsourcing for small and medium-sized businesses.

Recs

5
Player Avatar InvestWhatWorks (93.36) Submitted: 8/16/2011 9:52:00 AM : Outperform Start Price: $26.37 PAYX Score: +2.86

This outperform pick is a long-term bet that unemployment and interest rates will eventually improve.Paychex is a payroll and human resource service company that provides services including Payroll Services, Time and Labor Management, HR Administration & Compliance, 401(k) Employee Benefits, Group Health Insurance, and Paychex HR Solutions.I am stating the obvious with this paragraph, but: Paychex’s business does better when unemployment is low. When more people are employed, there are more potential customers for Paychex. So when unemployment improves, so will Paychex’s business.Likewise, when interest rates rise, so will Paychex. In addition to the fees Paychex charges for all of their various services, Paychex also earns interest on the money they hold for their clients. Low interest rates have been nothing new, of course. Paychex has been able to successfully plan around this low interest rate environment. When interest rates do rise eventually though, Paychex’s earnings stand to benefit greatly.Unemployment and interest rates will not improve other night. It will take a while for unemployment to return to 2007-levels. Interest rates appear to be staying low for a while. But as you wait for those two factors to improve, Paychex pays shareholders a very nice 4.55% dividend yield (at the time I am writing this) to just hold the stock and wait. Not a bad deal. Not a bad deal at all.Paychex itself is not just sitting on its hands until these economic improvements occur, however. They are adding new clients, expanding their business offerings and acquiring other companies. Paychex acquired SurePayroll, Inc. in February 2011 and ePlan Services, Inc. in May 2011.If you believe that we have seen the worst in terms of unemployment, then Paychex is a great bet on that. Reinvest that 4.55% dividend back into Paychex. When the US economy improves substantially, you will be in a great position to take advantage of those economic improvements with Paychex.

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