This article originally appeared on The DIV-Net September 28, 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. The stock is trading at a 10.5% discount to its calculated fair value of $43.47. ADP earned a Star in this section since it is trading at a fair value.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
- Free Cash Flow Payout
- Debt To Total Capital
- Key Metrics
- Dividend Growth Rate
- Years of Div. Growth
- Rolling 4-yr Div. > 15%
ADP earned three Stars in this section for 1.), 2.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. ADP earned a Star as a result of its most recent Debt to Total Capital being less than 45% and also earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1974 and has increased its dividend payments for 34 consecutive years.
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 a Star in this section for its NPV MMA Diff. of the $9,903. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as ADP has. If ADP grows its dividend at 15.3% per year, it will take 2 years to equal a MMA yielding an estimated 20-year average rate of 3.9%. ADP earned a check for the Key Metric ‘Years to >MMA’ since its 2 years is less than the 5 year target.
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 more than double 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 three Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of five Stars. This quantitatively ranks ADP as a 5 Star-Strong Buy.
Using my D4L-PreScreen.xls model, I determined the share price could increase to $108.65 before ADP’s NPV MMA Differential dropped to the $500 that I like to see for a stock with 34 years of consecutive dividend increases. At that price the stock would yield 1.18%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 5.6%. This dividend growth rate is significantly lower than the the 15.3% used in this analysis, thus providing a margin of safety. ADP has a risk rating of 1.50 which classifies it as a medium 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. With its low debt and strong free cash flow ADP is an attractive buy at prices below $43.47. 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 was long in ADP (1.1% of my Income Portfolio).
What are your thoughts on ADP?