There are no safe havens in the stock market. Every stock carries risk. But some less than others. This column features stocks that have shown one or more of the following characteristics: less volatility, better earnings, larger market caps, safe and increasing dividends. In these times of turmoil, our goal is to show readers better opportunities for investing with fewer risks.

February 22, 2010 - Paychex, Inc. (PAYX-NASDAQ) together with its subsidiaries, provides payroll, human resource, and benefits outsourcing solutions for small- to medium-sized businesses in the United States and Germany. It offers payroll processing services, which include calculation, preparation, and delivery of employee payroll checks; production of internal accounting records and management reports; preparation of federal, state, and local payroll tax returns; and collection and remittance of clients' payroll obligations.

Its human resource outsourcing services include payroll, employer compliance, human resource and employee benefits administration, risk management outsourcing, and the on-site availability of a professionally trained human resource representative.

In addition, the company offers retirement services administration; workers' compensation insurance services; health and benefits services; time and attendance solutions; and other human resource services and products. It also operates a professional employer organization. As of May 31, 2009, the company served approximately 554,000 clients in the United States; and 1,600 clients in Germany. Paychex, Inc. was founded in 1971 and is headquartered in Rochester, New York.

Two things an investor should know right away: there is no debt on the books, and this year (fiscal year ends May 31) earnings will be down ....again. Earnings were $1.48 in fiscal 2009 with 22 analysts having an estimate of $1.33 for 2010 (with a range of $1.30 to $1.37). Next year, they see $1.43. Revenues will also be lower this year. Analysts forecast $2.0 billion, 4.1% lower than the $2.08 billion of last year. Next year, they estimate $2.09 billion, up 4.5%.

Earnings were going along nicely for years. In 2006, they were $1.22, then $1.35, followed by $1.56. Then last year, $1.48 and this year's most likely $1.33. But for 2011, the trend should start up again. Here's why.

Interest is a big part of how Paychex makes earnings. They receive payments from companies before they in turn cut checks for employees. The time between when PAYX receives the funds and pays them out is an opportunity to earn interest. Since interest rates are so low currently, this part of the earnings engine has been slowed. Interest earned on client funds in the November quarter was down 31% from the same quarter last year. Also, there are fewer companies using PAYX so revenues are smaller, but it's really the interest rate that's been the major influence.

Three things will change which will improve returns. The first is that management decided to alter the investment strategy, increasing profitability. Second, if the economy begins to recover, more companies will use PAYX's services, increasing total revenues. Third, as the economy recovers, interest rates will likely rise, increasing profits.

Management is going after expenses. It lowered total costs by 3% in the November quarter compared to last year's same quarter. There were fewer employees as well as other cuts. Operating margins stayed wide, thanks to the decreased costs.

There's a healthy dividend here: $1.24 a year, giving a yield of 4.10%. It takes 91% of earnings to pay it. The dividend has increased annually since 1993 when it was 1 cent a share. In 2006, payout was $ .69. Then it jumped to $1.02, followed by $1.22, then $1.24. It would be a pleasant surprise if it were raised again this year, and the company's history suggests that it's likely.

The Human Resources group grew strongly in the past, racking up double digit advances in revenues. But with the economy slowing, this department saw only a 3% gain in revenues in the latest quarter. Analysts see only a 3% - 6% rise in sales for this division this year.

More numbers: P/E is 22. Price to sales is 5.41. Price to book is 7.85. Book value is $3.85. Operating margin for the last 12 months was 37.34% while Profit margin was 24.44%. Return on Equity was a remarkable 36.91%. There's $287.32 million in cash for 80 cents a share. There is no debt. Current ratio is 1.12. There are 361.41 million shares outstanding with a Float of 322.25 million. Insiders own 10.68% of the stock. Institutions have 70.20%. Value Line gives the company an A for Financial Strength.

PAYX should appeal to Conservative investors who believe the economic recovery is about to begin or has already started. More companies will use PAYX's services in a thriving economy, and interest rates will definitely rise. Both will increase revenues and profitability. And with no debt, higher interest rates can only help.

- Company Web site: www.paychex.com

- Ted Allrich