Tuesday, May 27, 2008

Automatic Data Processing (ADP) Dividend analysis

Automatic Data Processing, Inc., together with its subsidiaries, provides technology-based outsourcing solutions to employers, vehicle retailers, and manufacturers. It operates in three segments: Employer Services, Professional Employer Organization (PEO) Services, and Dealer Services.
Automatic Data Processing is a dividend aristocrat as well as a component in the S&P 500 index. It has been increasing its dividends for the past 33 consecutive years. Over the past 10 years the company has delivered an average total return of 6.20 % annually to its shareholders. The majority of the gains occurred from 1998 to 2000. The stock has not recovered from its November 2000 highs yet.

At the same time the company has managed to deliver an 8.40% average annual increase in its EPS since 1998. ADP has also managed to consistently purchase back 2.1% of its shares on average in every year since 2000.

The ROE has fluctuated in the 17%-25% range for our study period. Overall this indicator has increased since 1998.

Annual dividend payments have increased over the past 10 years by an average of 15.20% annually, which is significantly above the growth in EPS. A 15% growth in dividends translates into the dividend payment doubling almost every 5 years. If we look at historical data, going as far back as 1983, ADP has indeed managed to double its dividend payments every five years.

If we invested $100,000 in ADP on December 31, 1997 we would have bought 3258 shares (adjusted for a 2:1 split in January 1999). Your first quarterly check would have amounted to $215 in early 1998. If you kept reinvesting the dividends though instead of spending them, your quarterly dividend payment would have risen to $1058.50 by December 2007. For a period of 10 years, your quarterly dividend has increased by 339 %. If you reinvested it though, your quarterly dividend would have increased by 392%.

I also like the fact that the company’s dividend payout has not exceeded 50% over the past 10 years in addition to the low P/E ratio which is less than 19 and the above average dividend yield of 2.70%.

Full Disclosure: I own shares of ADP
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