Automatic Data Processing, Inc. (ADP) provides technology-based outsourcing solutions to employers, and vehicle retailers and manufacturers. It operates in three segments: Employer Services, Professional Employer Organization Services, and Dealer Services. This dividend aristocrat has raised dividends for 35 consecutive years. Back in November 2009 Automatic Data Processing announced a 3% dividend increase.
Over the past decade this dividend stock has delivered an average total return of 1.20% annually. In 2007 ADP spun off its Brokerage Services business, distributing one share of Broadridge Financial (BR) common stock for every four shares of ADP common stock held by shareholders. The total returns calculation for ADP over the past decade includes this transaction.
The company has managed to deliver an 8.10% average annual increase in its EPS between 2000 and 2009. Analysts expect Automatic Data Processing to earn $2.40 share in FY 2010, followed by an increase to $2.55/share in FY 2011. While the employment picture is bleak in the US, it is improving. In addition to that, the market for payroll outsourcing for small and medium sized businesses could provide opportunities for growth, because of low penetration from outsourcers. The market for processing services that ADP specializes in is expected to grow at a pace of 5% per annum until 2013. The company's venture in the business process outsourcing is a bold move, considering the intense competition in this market segment, which could add pressure to margins. The market for business process outsourcing is expected to grow by almost 7% per year by 2013. Overall there is a high barrier to entry in the payroll processing field, since a sizeable investment in infrastructure is needed to process millions of employees' information. The big plus of this business is the recurring revenue stream and strong cash flow. ADP is a great proxy for exposure to the technology sector, since it has a proven business model, and it is less susceptible to technological obsolescence. As prices for technology products decrease, ADP can do its job cheaper, which helps profitability.
The Return on Equity has remained in a tight range between 17% and 26%. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.
Annual dividends have increased by an average of 15.90% annually since 2000, which is higher than the growth in EPS. A 16 % growth in dividends translates into the dividend payment doubling every four and a half years. If we look at historical data, going as far back as 1974, Automatic Data Processing has indeed managed to double its dividend payment every four and a half years.
Over the past decade the dividend payout ratio has doubled to 50%. This is a direct result of the higher dividend growth in proportion to earnings growth. As the company matures, it has returned most of its earnings back to stockholders in the form of increased distributions and share buybacks. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.
Currently Automatic Data Processing is attractively valued at 15.60 times earnings, yields 3.20% and has an adequately covered dividend payment. In comparison to its closest competitor Paychex (PAYX), which trades at a P/E of 20.40 and yields 4.60% with a dividend payout ratio of 94%. I view ADP as more attractively valued. I would be looking forward to adding to my position in Automatic Data Processing (ADP) on dips.
Full Disclosure: Long ADP
- Paychex (PAYX) Dividend Stock Analysis
- Eight Companies Rewarding investors with higher dividend payments
- 14 Dividend Stocks with Dividend Growth Potential
- Dividend Investing Works in All Markets
This is a guest post by Mike, aka The Dividend Guy. He authors The Dividend Guy Blog since 2010 and manages portfolios at Dividend Stocks Ro...
Dividend growth stocks are the gift that keeps on giving . I like the fact that most of the work in selecting good dividend growth stocks is...
I have shared with you early in the year, that I am essentially living off dividends and side income in 2016. I am saving my other income i...
Last week I shared with you the list of 2016 Dividend Aristocrats and its performance over the past decade . In addition, I isolated twenty...
I pick my own dividend paying stocks in my taxable accounts, and wouldn’t have it any other way. I know some of you have mentioned that they...
Mark Seed is passionate about personal finance and investing and is the blogger behind My Own Advisor . Mark is currently investing in divi...
I am a fairly frugal person . An example of that is the fact that I drive a 15 year old car. I would likely keep driving this car until all ...
This is a guest post from Keith Park, who writes about dividend investing on DivHut . Keith has been a dividend growth investor since 2007 f...
My retirement strategy is focused on building a dividend portfolio of high quality blue chips, which are reliable dividend payers. For my di...
This is a guest contribution from Liquid at Freedom 35 Blog . Liquid is an avid investor in the North American financial markets and blogs a...