It is no doubt that the labor market is strong and the Paychex Inc (NASDAQ:PAYX) results proves it. While there are still lingering issues with the labor market, employment conditions have surpassed pre-COVID levels and have companies like PayChex and Cintas (NASDAQ:CTAS) on track for sustained growth. What this means for investors in these troubled times is a stock with far less exposure to the woes plaguing the S&P 500 than many others in the market. If you’re looking for a place to park some money with an expectation for growth, dividends, and dividend growth Paychex is a fine choice.
Paychex Results Give Evidence Of Leverage
Paychex’s fiscal Q1 earnings report gives evidence of something we've been expecting for the last few quarters and that is leverage. While the average receipt per client fell at the height of the pandemic the number of clients grew. Now, with workforces slowly rebuilding to pre-COVID levels, the business has exceeded those levels for Paychex and is expected to continue growing.
The company reported $1.08 billion in consolidated revenue which is good for a gain of 15.9% over last year and 8.8% over 2019. The revenue beat the consensus by $40 million or 370 basis points and led the company to increase guidance. On a segment basis, Management Solutions led with a 17% increase driven by an increased client base, improved penetration, and a higher check average per client. The PEO and Insurance segment grew by 14% due to greater numbers of on-site employees.
Moving down the report, the company says it was able to decrease expenses by 1% across the network or -4% on an adjusted basis. This helped to drive a high double-digit increase in operating income and strength on the bottom line. The company's GAAP earnings of $0.92 beat the consensus by $0.11 while the adjusted earnings of $0.89 beat the consensus by $0.09 and both helped improve an already strong capital position.
Turning to the guidance, the company expects full-year 2022 revenue growth in a range of 8% versus the 7.37% expected by the analyst. We see upside risk in these numbers due to ongoing economic expansion within the United States and the company’s obvious leverage. Margins are expected to widen to a range of 38% to 39% and drive EPS growth to 12% to 14% versus the 11.16% consensus currently indicated by Marketbeat.com.
Paychex Is A Paycheck For Dividend Growth Investors
Paychex is a cash-generating machine and one that is growing and paying a healthy dividend that is also growing. The stock currently yields about 2.45% with only one red flag. The payout ratio is 78% of earnings but that is mitigated by a very very healthy balance sheet. The company has incredibly low levels of debt, is leveraged at less than 1X earnings, has a high coverage ratio, is net cash, and has plenty of free cash flow to continue raising the dividend for another 10 years. The next distribution increase is expected in the fiscal fourth quarter and should run in the range of 8 to 10%.
The Technical Outlook: Paychex Pops, Triggers Buy Signal
Paychex price action popped more than 5% in the wake of the Q1 earnings report and may have gone higher if not for broad market selling on the same day. Price action created a strong candle with a large lower shadow confirming support at the short-term moving average. Support is confirmed by the indicators as well, both MACD and stochastic are showing bullish crossovers in tandem with the move above the short-term moving average which is a combination that we consider to be a strong buy signal. Price action should move up to retest the recent highs near $120 fairly soon and then break out to new highs before the end of the year.
