Up to date on April 18th, 2024 by Bob Ciura
Automated Knowledge Processing (ADP) may not be a family identify, however it must be for dividend progress buyers. ADP has raised its dividend every year for 49 years in a row.
ADP is a member of the Dividend Aristocrats, a bunch of 68 shares within the S&P 500 Index with 25+ years of consecutive dividend will increase. ADP has one of many longest streaks of dividend will increase among the many Dividend Aristocrats.
We now have created a full listing of all 68 Dividend Aristocrats, together with vital metrics like P/E ratios and dividend yields, which you’ll be able to obtain by clicking on the hyperlink under:
Disclaimer: Certain Dividend isn’t affiliated with S&P World in any method. S&P World owns and maintains The Dividend Aristocrats Index. The knowledge on this article and downloadable spreadsheet is predicated on Certain Dividend’s personal overview, abstract, and evaluation of the S&P 500 Dividend Aristocrats ETF (NOBL) and different sources, and is supposed to assist particular person buyers higher perceive this ETF and the index upon which it’s based mostly. Not one of the info on this article or spreadsheet is official information from S&P World. Seek the advice of S&P World for official info.
ADP’s lengthy historical past of dividend progress is the results of a robust enterprise mannequin and sturdy aggressive benefits. This has led to domination of its core markets for many years. To cite legendary investor Warren Buffett, ADP has a large financial moat.
This text will overview ADP’s fundamentals and focus on whether or not the inventory is buying and selling at a sexy sufficient valuation to purchase now.
Enterprise Overview
ADP is a enterprise outsourcing providers firm. It was based in 1949 and started with a single consumer. Within the 75 years since ADP has grown into the main payroll and human useful resource outsourcing firm. It has over 1 million shoppers in additional than 140 international locations worldwide.
ADP offers providers to corporations of all sizes, together with payroll, advantages administration, and human assets administration. ADP enjoys excessive demand for these providers, as corporations would like to outsource these features to be able to higher give attention to their core enterprise actions.
Supply: Investor Presentation
ADP has a number one place throughout its strategic pillars, in addition to a extremely diversified consumer listing.
The corporate has undergone vital restructuring in recent times. In 2014, ADP spun off its human capital administration enterprise, which now trades as CDK World (CDK).
ADP posted fiscal second-quarter earnings on January thirty first, 2024, and outcomes have been fairly robust. Adjusted earnings-per-share got here to $2.13, which was three cents forward of estimates, and up 9% year-over-year. Internet earnings have been up 8% to $878 million. Income was up 6.4% year-over-year to $4.67 billion, and $10 million forward of estimates. The corporate noticed natural constant-currency income rise 6%.
Curiosity on funds held for shoppers rose 20% year-over-year to $225 million, as market charges stay excessive relative to latest historical past. Common consumer funds balances declined 2% to $32.6 billion year-over-year, whereas the yield on these funds expanded by 50 foundation factors to 2.8%.
Development Prospects
Automated Knowledge Processing has compounded its adjusted earnings-per-share at a price of greater than 11% per yr over the past decade, which we consider it may possibly come near matching shifting ahead.
Past 2023, we consider the corporate is able to delivering 9% annualized progress in earnings-per-share over full financial cycles. A lot of this progress is prone to be pushed by the corporate’s Skilled Employer Group (PEO) Providers section, which continues to ship robust progress.
Importantly, this income progress has been accompanied by significant margin growth, which implies that the section’s progress has had an outsized influence on the agency’s backside line.
As well as, share buybacks are a low single-digit tailwind to annual EPS progress, and we anticipate that can proceed shifting ahead.
ADP credit its giant and rising HCM market as a serious progress catalyst within the subsequent a number of years.
Supply: Investor Presentation
Two key long-term progress catalysts for ADP are continued payroll will increase and increasing laws.
The variety of workers on ADP shoppers’ payrolls continues to develop, and we consider this can proceed for the foreseeable future. Subsequent, the more and more complicated regulatory atmosphere creates vital compliance prices for companies; this additionally helps present ADP with long-term progress.
Aggressive Benefits & Recession Efficiency
Many aggressive benefits gas ADP’s progress. ADP has a deep reference to its prospects and enjoys a robust popularity for customer support, which helps preserve buyer retention very excessive.
ADP enjoys an incredible scale that its opponents can’t match. As a worldwide firm, ADP is uniquely positioned to assist corporations with workers on a number of continents.
As well as, ADP advantages from a recession-resistant enterprise mannequin. ADP’s earnings-per-share through the Nice Recession are proven under:
2007 earnings-per-share of $1.83
2008 earnings-per-share of $2.20 (20% enhance)
2009 earnings-per-share of $2.39 (8.6% enhance)
2010 earnings-per-share of $2.39 (flat)
ADP elevated earnings-per-share in 2008 and 2009, which is a uncommon accomplishment. The rationale for ADP’s continued progress through the Nice Recession is that companies nonetheless want payroll and human useful resource providers, even in an financial downturn.
The corporate continued to carry out comparatively effectively within the 2020 financial downturn brought on by the coronavirus pandemic. ADP remained extremely worthwhile through the pandemic, which allowed it to keep up its streak of annual dividend will increase.
The mandatory nature of ADP’s providers helps insulate the corporate from the results of a recession. Given ADP’s dimension and scale, we consider it can carry out effectively through the subsequent recession.
Valuation & Anticipated Returns
We forecast adjusted earnings-per-share of roughly $9.15 for fiscal 2024. Based mostly on the present share worth of ~$242, the inventory has a price-to-earnings ratio of 26.4.
We see honest worth for ADP at 29 instances earnings, that means the inventory seems to be undervalued. This means a small tailwind to whole returns within the coming years from valuation growth.
If the P/E a number of expands from 26.4 to 29 over the subsequent 5 years, it might increase annual returns by 1.9% per yr.
We anticipate ADP to develop earnings-per-share by 9% yearly over the subsequent 5 years. As well as, the inventory has a present dividend yield of two.3%.
The mixture of earnings progress, dividends, and valuation growth leads to a complete anticipated return of 13.2% per yr over the subsequent 5 years.
ADP will virtually actually proceed to extend its dividend for a few years to return, provided that its fundamentals are so robust. ADP maintains a goal payout ratio of 55%-60% of annual earnings, so the payout could be very protected with room to develop.
Remaining Ideas
ADP is a robust enterprise. The corporate maintains a big listing of shoppers and holds a prime place within the trade. This offers it a large financial “moat”, a time period popularized by investing legend Warren Buffett.
Certainly, ADP’s broad moat retains opponents at bay, resulting in excessive profitability ranges.
There must be loads of progress going ahead, each when it comes to earnings and dividends. Laws proceed to grow to be extra complicated.
And, because the financial system expands, corporations are including workers and more and more use ADP’s providers. If a recession happens, ADP ought to proceed to extend its dividend, as prospects will nonetheless want its providers.
With an anticipated price of return above 13%, we price ADP inventory a purchase.
In case you are thinking about discovering high-quality dividend progress shares appropriate for long-term funding, the next Certain Dividend databases might be helpful:
The foremost home inventory market indices are one other strong useful resource for locating funding concepts. Certain Dividend compiles the next inventory market databases and updates them month-to-month:
Thanks for studying this text. Please ship any suggestions, corrections, or inquiries to [email protected].