March 4 (Bloomberg) — Shares of Paychex Inc. are poised to outpace the broader market as the prospect of higher interest rates and more job creation will buoy the payroll-service provider.
The company generates income from the interest earned on money it holds for clients, a so-called float, so rising Treasuries yields are "pure gravy" to its net income, said David Yucius, who oversees $250 million in assets as president of Aurora Investment Counsel Inc. in Atlanta. Paychex stock has lagged behind the Standard & Poor's 500 Index, amid a backdrop of low rates and slow job growth for small- to medium-sized business in the past five years, he said.
Shares of the Rochester, N.Y.-based company have risen 51 percent since April 3, 2009, trailing the S&P 500's 119 percent increase. The yield on 10-year U.S. Treasuries — at 2.6 percent as of 5 p.m. in New York yesterday, according to Bloomberg Bond Trader data — is down from as high as 4 percent in April 2010.
Paychex manages about $4 billion in client funds as well as approximately $800 million in its own corporate investments, Chief Financial Officer Efrain Rivera said in a phone interview. About half that total is invested in longer-term securities and approximately $400 million to $500 million in this portfolio matures and re-prices each year, so if the yield on 10-year Treasuries increases by 25 basis points, or 0.25 percentage point, that translates to an additional $1 million in annual income, he estimated.
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