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Paychex: 4.3% Dividend Yield Will Help Holders Ride Out Tough Employment Market

Shares of Paychex (PAYX) haven’t performed well in recent years, and that shouldn’t be a surprise: the company provides payroll-processing services to small and midsize corporations, and its fortunes track the health of the small-business sector. Which isn’t great right now.

The weak economy has driven some small companies out of business, and many more have had to shrink their workforce to survive. And although it looked for a while earlier this year as if the segment was getting some of its mojo back, recent economic reports suggest small businesses are dialing back their hiring. Not good for Paychex.

Shares of Automated Data Processing (ADP), the nation’s other leading payroll-outsourcing provider, haven’t been hurt so badly, because ADP’s clients tend to be large corporations, better able to ride out a rough patch. Here’s how Paychex’s small-biz exposure has hurt its stock.

PAYX Chart

PAYX data by YCharts

A beaten-up stock, of course, is often where dividend investors find an entry point. Some time ago, Paychex began bumping up its dividend payout, and as a result, the stock currently offers an attractive 4.3% dividend yield. These days, it’s also distributing to stockholders most of its earnings, as a look at its payout ratio shows.

PAYX Dividend Yield Chart

PAYX Dividend Yield data by YCharts

With recent economic indicators downbeat, income investors understandably want to know how safe Paychex’s dividend is. On that count history, and the company’s fundamentals, suggest the payout will hold up. Profit and revenue growth haven’t bounced all the way back, but they’ve recovered significantly from the darkest days of the downturn. Profit margins have held up reasonably well. And while the company doesn’t keep a lot of cash around, it reliably throws off a lot of free cash and, other than its dividend, doesn’t face any serious cash demands.

PAYX Profit Margin Chart

PAYX Profit Margin data by YCharts

Paychex shares are likely to remain under pressure for a while yet. But for dividend investors, it’s an attractive option – particularly because revenue and profit (and its stock price) will surge when the economy eventually gets rolling again.

With interest rates so low, dividends offer a nice way to generate income. But when we buy a security for its dividend, we’re also buying the underlying stock. It’s important to check out a company’s fundamentals, and to read through its 10-K as well.

James P. Miller is an editor for the YCharts Pro Investor Service which includes professional stock charts, stock ratings and portfolio strategies.

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