Dividend Aristocrats

ADP Stock, a 45 Year Dividend Aristocrat

Automatic Data Processing (ADP) belongs in the S&P 500 Dividend Aristocrats group. These are elite blue chip dividend paying stocks that have raised their cash dividends for at least 25 years, without missing a single payment. ADP Stock has consistently grown its dividend for 45 years in a row, which is nothing short of spectacular.

Dividend Aristocrats are some of the best dividend growth stocks you will find in any stock market. ADP Stock last raised its annual dividend by 15% on November 12th, 2019 to $3.64 per share.

Having said that, let’s review ADP Stock for its latest 3rd Quarter 2019 financial results, revenue and dividend growth history, valuation and performance to the S&P 500.

Table of Contents

This article is broken down in to sections, feel free to jump to the area that interests you.

Business Synopsis

ADP which is now branded as “Always Designing for People” was founded in 1949 with one mission in mind; to free businesses from non-core tasks such as processing payroll and human resources management.

Today, the company is one of the top cloud-based human capital management companies with 810,000 customers in 140 countries. We really like their slogan which states, “At ADP, we’re designing a better way to work so you can achieve what you are working for.”

In its Investor Presentation, the company gives a top line overview of its operations. ADP processes payroll for 26 million workers in the United States and 15 million internationally, as well is in partnership with over 7,100 tax agencies in the US.

The company processed $2.1 trillion of payroll and taxes for its clients in 2019, which is a massive number.

ADP Stock Overview and Pillars

Employing 58,000 people, ADP’s business strategy is based on 3 key pillars. They are:

Pillar #1: HCM Solutions provides cloud-based software helping employers of all sizes hire employees.

Pillar #2: HRO Solutions provides HR and payroll administration, employee benefits administration, employer liability and other associated functions.

Pillar #3: Global Solutions is expanding ADP’s operations globally and currently operats in 140 countries.

Revenue Analytics and Share Buybacks

For full year 2019, ADP generated $14.2 billion in revenues and earned a net income of $2.3 billion, implying a 16.2% net profit margin. Revenue grew 6% year over year from 2018’s total of $13.35 billion.

Over the last decade, ADP has grown its revenues from $8.93 billion in 2009 to $14.2 billion in 2019. This represents a compounded annual growth rate (CAGR) of 4.75%. The company has grown its diluted earnings per share from $2.4 in 2010 to $5.24 in 2019, representing a compounded annual growth rate (CAGR) of 8.1%.

Trading on the New York Stock Exchange, ADP has a market capitalization of $76.24 billion and pays a 2% dividend yield. This is about 20 basis points higher than the dividend yield paid by the S&P 500 index.

The company has divided its financial reporting in to 2 segments

1) Employer Services (ES)

2) Professional Employer Organization (PEO)

ADP provides a screenshot of compounded annual growth rate (CAGR) for its revenues over the last 10 years. This number sits at a healthy 7% clip. PEO is the fastest growing segment growing revenues at a compounded annual growth rate (CAGR) of 14% while ES is at 5%.

On the right side of the screenshot shows performance of ADP Stock versus the S&P 500. In the last decade, ADP has out performed S&P 500 by 79%.

ADP Revenue Growth History

Growth Outlook

According to ADP’s 2019 Investor Presentation, Human Capital Management is a $125 billion global market, of which it has only captured $14.2 billion, which works out to 11.4%. Human Resources Outsourcing is the fastest growing segment growing at 8% annually, while HR in the US is expected to grow by 4% annually and HR international at 6%.

There are some tailwinds working in the company’s favor including complexity of HR and legislation, fast growing job market and very low unemployment rate, gig economy with the likes of Uber, wage growth and higher competition for talent.

Addressable Payroll Market Stats

In its 1st Quarter,  2020 earnings results, ADP reported a 6% growth in revenues coming in at $3.5 billion. Net income grew 15% coming in at $582 million implying a net profit margin of 16.6%. Employer Services segment grew revenues 4% while PEO grew revenues at 8%.

What’s also interesting is interest earned on clients’ cash held with ADP grew 13% to $134 million. Think of this as free money the company makes while paying its clients’ employees.

Management has provided outlook for 2020 fiscal year where revenues are expected to grow between 6% to 7% led by PEO Services which is expected to grow 9% to 11%. Margin expansion is expected between 100 bps to 125 bps and overall earnings per share growth of 12% to 14%.

Dividend Growth History

ADP is a member of the S&P 500 Dividend Aristocrats index since it has raised its dividends for 45 years in a row, without missing a single year. According to its Investor Relations site, the company has grown its dividend from 8 cents per share in 1990 to $3.28 in 2019. This represents a compounded annual growth rate (CAGR) of 13.2% which is truly stunning.

Attached chart shows ADP’s dividend growth history showing a nice steep uptrend and the power of compounding in play.

ADP Stock's Dividend Growth History

Below chart shows year over year growth in ADP’s dividend since 1990. During the great financial crisis of 2009, ADP slowed its dividend raises to low single digits. Likewise, similar pattern emerged during the commodity price crash of 2016.

ADP Stock's Dividend Growth Year Over Year

Dividend Payout Ratio

Lets calculate the the dividend payout ratio for ADP Stock. Dividend Payout Ratio measures how much of a company’s free cash flow is paid out in the form of dividends.

Free cash flow is the cash a company generates from its daily operating activities minus capital expenditures like investing in new plants or equipment.

Free cash flow is calculated from the statement of cash flows, and is not artificially modified using accounting rules or non-cash expenses like depreciation, amortization, fair value revaluations, etc.

In its 2019 annual report, the company states cash from operations equals $923 million while capital expenses totaled $290 million.

Free Cash Flow = Cash from Operations – Capital Expenditures

= $923 million – $290 million

Free Cash Flow = $633 million

Dividends Paid in 2018 = $437 million

Dividend Payout Ratio = Total Dividends Paid / Free Cash Flow

= $437 million / $633 million

Dividend Payout Ratio = 69%

A dividend payout ratio of 69% is neutral; we would consider this dividend easy to maintain and safe for investors to trust.

Valuation and Long Term Performance

ADP Stock has grown from $5 in January 1990 to $178 as of January 2020. This rise is at a compounded annual growth rate (CAGR) of almost 13% which is just spectacular!

During the great financial crisis of 2008, the stock dropped 35% from peak of $44 to trough of $29. It significantly out performed the drop experienced by the S&P 500 which was 56%.

Quite interestingly, ADP Stock is a member of the S&P 500 Technology Sector (XLK). Companies in XLK usually command a higher valuation than the broader market and this is also true for ADP.

ADP stock trades at 29 times forward estimated earnings of full year 2020 while the broader market as measured by the S&P 500 trades at 18.5 times. We think the stock is too expensive given this valuation and investors should not chase it up here.

However, a general market correction of 10% would present significant buying opportunities for long term investors.

ADP Stock is in red line versus the S&P 500 which is in blue. Over the last decade, ADP Stock has gained 509% handily beating the performance of the S&P 500 which has gained 198%.

Executive Summary

Here is what we like and don’t like about Automatic Data Processing (ADP) Stock.

Likes

  • Consistent dividend growth for 45 years, making this a Dividend Aristocrat.
  • Sizable 11% annual dividend growth rate over last 5 years.
  • Dividend payout ratio of 69% which leaves room for future dividend growth, smart acquisitions and share repurchases.

Dislikes

  • A valuation premium to the S&P 500. Trades at 29 times forward earnings while the S&P 500 trades at 18.5 times.
Market Capitalization $76.24 Billion
Dividend Yield 2%
Forward PE Ratio 29 times earnings
Dividend Growth (5 Year Avg.) 11.2%
Dividend Payout Ratio 69%
EPS Growth (5 Year Avg.) 15.3%
2018 Revenues $14.2 Billion
Gross Margin 48.7%
Net Margin 14.5%

ADP Stock Ex-Dividend Dates

Ex-Date Record Payable Amount
12/12/2019 12/13/2019 01/01/2020 $0.91
09/12/2019 09/13/2019 10/01/2019 $0.79
06/13/2019 06/14/2019 07/01/2019 $0.79
03/07/2019 03/08/2019 04/01/2019 $0.79
12/13/2018 12/14/2018 01/01/2019 $0.79
09/13/2018 09/14/2018 10/01/2018 $0.69
06/07/2018 06/08/2018 07/01/2018 $0.69
03/08/2018 03/09/2018 04/01/2018 $0.63

Source: ADP Investor Relations

ADP Stock Price

The most recent price for ADP’s stock can be accessed by going to the company’s Investor Relations website and clicking on “Stock Information.”

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