This article originally appeared on The DIV-Net March 2, 2009.
Linked here is a detailed quantitative analysis of Automatic Data Processing Inc. (ADP). Below are some highlights from the above linked analysis:
Company Description: Automatic Data Processing Inc. is one of the world’s largest independent computing services companies, provides a broad range of data processing services.
Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:
- Avg. High Yield Price
- 20-Year DCF Price
- Avg. P/E Price
- Graham Number
ADP is trading at a discount to 1.) and 3.) above. If I exclude the high and low valuations and average the remaining two, ADP is trading at a 16.0% discount. ADP earned a Star in this section since it is trading at a fair value.
Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description:
- Rolling 4-yr Div. > 15%
- Dividend Growth Rate
- Years of Div. Growth
- 1-Yr. > 5-Yr Growth
- Payout 15% of avg.
ADP earned two Stars in this section for 2.) and 3.) above. With a 15.3% Dividend Growth Rate, ADP will more than double its dividend every 5 years. ADP has paid a cash dividend to shareholders every year since 1974 and has increased its dividend payments for 34 consecutive years. Last year’s dividend payout was 50%, up from 48% in 2007. Since the increase was in excess of 15 points, a Star is deducted, leaving a net of one Star in this section.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
- NPV MMA Diff.
- Years to > MMA
ADP earned both of the available Stars in this section. The NPV MMA Diff. of the $51,655 is in excess of the $2,500 minimum I look for in a stock that has increased dividends as long as ADP has. ADP’s current yield of 3.86% exceeds the 3.42% estimated 20-year average MMA rate.
Other: ADP is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index. ADP has a strong balance sheet and a steady cash flow stream. The company’s free cash flow is nearly 2.5 times its dividend. ADP repurchased 33 million of its shares in FY 2008. As the economy continues to slow in the near-term, ADP will face slower employment growth. Long-term opportunities for earnings growth should come from small and medium-sized business market and overseas. Risks include intense competition, threat of new entrants, along with failure to further penetrate small and midsized domestic business and international markets.
Conclusion: ADP earned one Star in the Fair Value section, earned one Star in the Dividend Analytical Data section and earned two Stars in the Dividend Income vs. MMA section for a net total of four Stars. This quantitatively ranks ADP as a 4 Star-Buy.
Using my D4L-PreScreen.xls model, I determined the share price could increase to $89.47 before ADP’s NPV MMA Differential fell to the $3,000 that I like to see. At that price the stock would yield 1.43%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the needed $3,000 NPV MMA Differential, the calculated rate is 3.1%. This dividend growth rate is significantly below the 15.3% used in this analysis, thus providing a margin of safety. ADP has a risk rating of 1.25 which classifies it as a low risk stock.
ADP is the leader in its segment. Barriers to entry are high requiring a sizable infrastructure to serve a large number of employees. I currently own ADP’s primary competitor Paychex Inc. (PAYX). I would consider initiating a position at prices below $36.75. For additional information, including the stock’s dividend history, please refer to its data page.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I did not have a position in ADP (0.0% of my Income Portfolio).
What are your thoughts on ADP?