Summary
ADP’s last quarter’s earnings were great, beating expectations by $0.16 at $1.65, and revenues were up 9.4% year over year.
Automatic Data Processing’s total return overperformed the Dow average for my 71-month test period by 127.35%, which is great, but the present entry point is pricey.
The dividend yield is average at 1.8% and has been increased for 47 years in a row; a dividend income company, a dividend aristocrat, close to a king.
Cash flow is good and will allow the dividend to be increased each year, and with cash left over for new application development and improvements.
Michael Vi/iStock Editorial via Getty Images Automatic Data Processing (NASDAQ: ADP ) is a buy for the total return and the dividend growth investor, a SWAN. ADP is one of the largest human resources products and services companies in the world. It is a conservative investment for the income investor who also wants good growth potential with the returning workforce, and interest rates will be increasing soon. Automatic Data Processing has a good cash flow, and the company uses some of the cash to expand its product line and to increase dividends each year. ADP is 7.76% of The Good Business Portfolio, being my IRA portfolio of good business companies that are balanced among all styles of investing.
As I have said before in previous articles: I use a set of guidelines that I codified over the last few years to review the companies in The Good Business Portfolio (my portfolio) and other companies that I am reviewing. For a complete set of guidelines, please see my article ” The Good Business Portfolio: Update to Guidelines, March 2020 “. These guidelines provide me with a balanced portfolio of income, defensive, total return, and growing companies that hopefully keep me ahead of the Dow average. The Good
Automatic Data Processing is the largest provider of human resources data processing in the United States and foreign countries. The Company provides business process outsourcing solutions. Its segments include Employer Services and Professional Employer Organization (PEO) Services. These services include payroll services, benefits administration, talent management, HR management, time and attendance management, insurance services, retirement services, and tax and compliance services.
One of the main reasons to own ADP is to have a steady quarterly income with the potential for good growth. Automatic Data Processing does meet my dividend guideline. Automatic Data Processing has an average dividend yield of 1.8% and has had increases for 47 years, making it a good choice for the dividend growth investor who wants consistent growing income. The dividend was last increased in November 2021 for an increase from $0.93/Qtr to $1.04/Qtr or a 12% increase. The five-year average payout ratio is moderate at 57%, which allows cash remaining for increasing the business of the company by adding new processors and features to existing programs. The cash flow drives ADP stock price up, and the company returns the cash to the shareholder with increasing dividends each year. Increasing interest rates to come soon are a tailwind since the company will make large gains on the payroll float. The graphic below shows the effect of the interest rates on the payroll float. I only like large-capitalization companies and want the capitalization to be at least greater than $10 billion. Automatic Data Processing easily passes my guideline. ADP is a large-cap company with a capitalization of $95 billion. ADP’s 2022 projected operating cash flow at $3.4 billion is great, allowing the company to have the means for growth and increasing dividends each year. Large-cap companies like Automatic Data Processing have the cash and ability to buy other smaller companies and weather any storms that might come along. I also look at the S&P rating and want it to be three stars or better. ADP’s S&P CFRA rating is three stars or hold with an estimated target price of $226, passing the guideline with a possible gain of 8% this year. ADP’s price is at the target price at present and has a high forward PE ratio of 31, making it a fair buy at this entry point. I rate Automatic Data Processing a nibble (start a small buy) for future growth and a good growing income; quality does not come cheap. ADP is a SWAN that has constant growth over many years with a dividend 5-year growth rate of 12.14%.
I look for the earnings of my positions to consistently beat their quarterly estimates. For the last quarter, on October 27, 2021, […]
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