Between August 2009 and August 2010, unemployment fell about 10 basis points, from 9.7% to 9.6%. That improvement is barely noticeable, and hardly much to be happy about as it still hovers around a worrisome 10%. With consumer discretionary businesses struggling as fewer consumers have a paycheck to spend, one would think a company in the business of handing out those paychecks would be getting ready to fold up and call it quits.
Paychex makes most of its money from HR solutions, but also makes some of its income by earning interest on client funds in the short period between when the client deposits payroll funds with Paychex and when Paychex pays the client's employees. In this low interest rate environment, that income has been on the decline. But the growth in the core business has been enough to float revenues higher while operating expenses decreased, widening operating profit margins by about 77 basis points, to 38.7% -- nearly twice that of competitor Automatic Data Processing
Paychex's wide margins could take a lot of squeezing before earnings would be in jeopardy, but what about cash flow? Paychex pays a quarterly $0.31 dividend, and earnings per share have been dangerously close to dropping below that number for several quarters now. Luckily, that's just an accounting number. The company holds more than a dollar in cash per share on the balance sheet, has no debt, and has been pulling in more than enough free cash flow to cover the payments.
In an environment where businesses across the industry spectrum have been struggling, Paychex has been at the heart of it all chugging away. It's as if someone forgot to tell this employment-dependent company that employment is in the trash right now, and that bodes pretty well for the company's future when things really do start to recover.
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