Get Paid To Wait For A Rebound At Paychex

Payroll processor and human resource business process outsourcing (HR BPO) firm Paychex (Nasdaq:PAYX) reported full-year results late last week that provided further evidence it has yet to see its business rebound from the credit crisis. Both business segments will need more robust employment trends to experience sustainable growth in the future, but when that may happen is highly uncertain. In the meantime, investors may find its above-average dividend yield appealing.

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Full Year Recap
Paychex total revenues increased a modest 4% to $2.1 billion. The core payroll service operations competes with larger archrival Automatic Data Processing (NYSE:ADP) and made up the vast majority of revenues at 69% of the total top line. It grew an even more modest 2%. Its human resource services business grew 10% to account for almost 29% of total revenue. This unit provides HR business process outsourcing functions and competes with the likes of giant BPO firms, including Wipro (NYSE:WIT) and Accenture (NYSE:ACN). This segment also competes with Hewitt Associates, which was acquired by insurance broker Aon (NYSE:AON) in July 2010.

Management held operating expenses flat, while SG&A costs grew at 4% to match the revenue increase. As a result, operating income advanced 8% to $786.4 million, and represented a very healthy operating margin of more than 37% of sales. Net income also grew 8% to $515.3 million for an impressive net margin of nearly 25%, and earnings reached $1.42 per diluted share. Free cash flow improved 11.8% to approximately $615 million, or $1.70 per diluted share. (Learn more in Understanding The Income Statement.)

Outlook
For the coming year, Paychex management projects modest net income growth between 5-7%. Analysts currently expect sales growth of about 5%, total sales of $2.2 billion and earnings of $1.51 per share.

The Bottom Line
Paychex remains hugely profitable, but has struggled to grow since the credit crisis began unfolding. Based on the current projections for the coming year, sales will be slightly ahead of the levels it posted in 2008, while earnings will fall slightly below pre-crisis levels. Free cash flow remains well below the $642 million reported at that time. (Read Spotting Cash Cows for more on this metric.)

With unemployment trends weakening again, it could be some time before Paychex experiences a consistent period of growth. Income-oriented investors love its above-average dividend yield of 4.1%, and are effectively getting paid to wait for operational trends to improve, but the forward P/E is currently about 20, and already discounts any future rebound in growth.

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