We’re Buying Automatic Data Processing (ADP) Today

This article first appeared on Dividends & Income

If you are old enough to ever have received an actual paper paycheck, and if you looked closely at that wonderful testimony to your hard work, you might have seen this little logo in the corner:

That’s the tag representing Automatic Data Processing (ADP) … and even though most folks now have wages directly deposited into their bank accounts, ADP remains vital to the way corporations conduct business.

Here is the official description of what ADP does:

Automatic Data Processing, Inc. provides cloud-based human capital management solutions worldwide. It operates through two segments, Employer Services and Professional Employer Organization (PEO) Services. The Employer Services segment offers strategic, cloud-based platforms, and human resources (HR) outsourcing solutions. Its offerings include payroll, benefits administration, talent management, HR management, workforce management, insurance, retirement, and compliance services. The PEO Services segment provides HR outsourcing solutions through a co-employment model. This segment offers protection and compliance, talent engagement, comprehensive outsourcing, and recruitment process outsourcing services. The company was founded in 1949 and is headquartered in Roseland, New Jersey.

Yes, the company once best known for printing paychecks is now a $57 billion global technology behemoth that helps corporations unite payroll, talent, time, tax and benefits administration.

From the ADP website:

ADP was an early pioneer of business outsourcing cloud technology and is a recognized human capital management innovator. Our global reach extends beyond 110 countries and territories, and our broad product depth addresses the human capital management needs of any business, from small “mom and pops” to multinational corporations with 100,000+ employees.

Here is another sampling of ADP clients, demonstrating the range of companies that use its services.

As you probably have surmised by now, Automatic Data Processing is my latest selection for our Income Builder Portfolio.

Later today, I will execute a purchase order for about $1,000 worth of ADP stock on Daily Trade Alert’s behalf.

It will be the IBP’s 34th position. Check out the entire portfolio HERE.

ADP = A Dependable Performer

Because ADP is so closely tied to how corporations manage their employees, it tends to perform best when the economy is healthy and unemployment is low.

Of course, thousands upon thousands of other companies would say the same thing … but most of them don’t have ADP’s outstanding track record of growing earnings and revenue.

The following FAST Graphs image shows how earnings have increased over the years.

From before the Great Recession through the just completed fiscal year, the only down period was 2010, as the nation was coming out of the financial crisis. (As you can see by the second set of circles, earnings are expected to decrease for fiscal year 2021; I will address that shortly.)

Same thing with sales: up, up, up. (The following bar graphs are from Simply Safe Dividends.)

All the important metrics have looked fabulous for years and years.

Meanwhile, debt has been low.

Having put up such impressive numbers, it’s little wonder that ADP has been a winning stock for shareholders.

ADP has roughly tracked the direction of the S&P 500 Index … except the company’s stock didn’t sink anywhere near as low during the Great Recession (red circle on Y-Chart below), and it has outperformed the market pretty decisively during good times.

Not many companies out there have better “quality metrics” than Automatic Data Processing.

OK, after all that good stuff, here comes the “but” …

But on July 29, the same day CEO Carlos Rodriguez and his team wrapped up fiscal year 2020 with yet another superb earnings report, the outlook for 2021 wasn’t as rosy due to the economic fallout of the global COVID-19 pandemic.

Millions of Americans are out of work, and every time it appears the coronavirus crisis might be waning, new hot spots emerge.

As a result, ADP forecasts earnings to decline by 13% to 18% and revenue to fall by 1% to 4%.

Unless the pandemic worsens and/or sticks around for another year or more, ADP officials expect things to start improving significantly by next spring, which will be the 4th quarter of its fiscal year.

Nevertheless, ADP’s stock price dropped nearly 9% in the two trading sessions after the company articulated its expectations for 2021.

Morningstar.com

The decline has created a buying opportunity for a company that has traded at a premium for many years.

At about 25 times projected forward earnings, ADP is still no bargain. It’s simply a better buy now than it was a week ago. (I will take a deep dive into the company’s valuation in my post-buy article, which will be published on Wednesday, Aug. 5.)

ADP = A-plus Dividend Production

Automatic Data Processing has a 2.7% dividend yield, and Simply Safe Dividends says the company’s payout is one of the safest around thanks to ADP’s solid free cash flow and low debt.

ADP also has increased its dividend annually for 45 years.

SimplySafeDividends.com

The area I circled in red shows something not seen all that often, especially among companies with long streaks: ADP’s dividend-growing trend has gotten better and better.

Its most recent raise — 15.2% last January — is better than its growth rate the last 5 years, which in turn is better than its exceptional 12% rate over the last two decades.

Wrapping Things Up

From its humble beginnings as a payroll processing business, ADP has become the leader in the human resources outsourcing industry — more than double the size of its closest competitor, Paychex (PAYX).

I considered Paychex, too, in part because of its tempting 3.4% yield, but I ended up going with the more established Dividend Aristocrat whose stock has performed twice as well the last two decades.

Despite some of the pandemic-related headwinds most companies are facing these days, I am confident ADP will enhance the quality and dividend growth of the Income Builder Portfolio for years to come.

As always, investors are strongly urged to conduct their own due diligence before buying any stocks.

— Mike Nadel

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Source: Dividends and Income