Investors who want to use their stock portfolios to build long-term wealth need to include dividend stocks that will provide them with a reliable stream of income. One of the most recommended dividend stocks is Automatic Data Processing (NASDAQ: ADP). If you haven't yet heard of this company, it's about time for you to become familiar with it.
A Good Dividend Stock
Founded in 1949, ADP is a pioneer in outsourced payroll processing services but it currently offers a wide variety of business outsourcing solutions. However, it is best known for its payroll and tax filing services, and its clients include some of the biggest companies in the world. In the Computer and Data Services category, it is Most Admired Company in America. It has also won AAA rankings from both Standard & Poor's and Moody's, the only IT services company to achieve this distinction.
Investors looking for dividend stocks should know that ADP is one of the so-called Dividend Aristocrats; companies that have made this list have increased their dividend payouts to shareholders annually for at least twenty five years. The companies that make this list include some of the most famous brands in the world, including Coca-Cola (NYSE:KO), 3M (NYSE:MMM), McDonald's (NYSE:MCD), Procter & Gamble (NYSE:PG) and Johnson & Johnson (NYSE:JNJ).
A quick overview of ADP's dividend statistics reveals that it has increased dividends for 38 consecutive years; it has a relatively high payout ratio of 56%, meaning that of every dollar in earnings, $0.56 is paid out in dividends, and 2.7% of its share price is paid out in dividends. ADP's current payout is $1.74 on an annual basis or $0.435 quarterly. The company last increased dividends in December 2012, and investors who jump in now will likely have to wait for six months or more before they enjoy an increase in payouts. But it is expected that as the general economy continues to improve and business activity increases, ADP will continue to increase its dividends.
Apart from these dividend stats, there are many other things to recommend about ADP. In its most recent earnings report for the third quarter of 2013, the company reported earnings per share of $0.99, an increase of nearly nine percent from the same quarter a year ago. Its revenue for the period grew to $2.2 billion, a 7% increase, while its net earnings reached $482.7 million. At the end of the quarter under review, the company held cash and cash equivalents worth $1.68 billion, a 17% increase. ADP's long-term debt, meanwhile, was $15.3 million.
Its outlook for FY 2013 was optimistic as the company revised its guidance figures upward. From an original revenue growth outlook of 5% to 7%, the figures were revised to 6% to 7%. Estimates of earnings growth were also reworked upward, from 5% to 7% to 6% to 7%. Its various divisions were also expected to experience revenue growth, with PEO services seeing the highest growth of 12%, followed by Dealer Services, an 8% to 9% increase, and Employer Services, 7%.
Apart from the fundamentals, it is also worth considering some of the intangibles that could affect a company's future performance. One of these is the leadership of a company, since the type of corporate culture he or she creates also impacts on the company's bottom line. Companies that had stressed employee satisfaction in the workplace generally had higher revenue increases and better total returns. In a ranking of the top CEOs conducted by Glassdoor, a site that monitors employee sentiment, ADP CEO Carlos Rodriguez was ranked 11th, with some 94% of employees surveyed saying they approved of his performance.
However, one factor that could affect ADP's financial performance in the coming years is increased competition in the business outsourcing sector. Although ADP was able to co-exist with rival Paychex (NASDAQ: PAYX), since the two companies targeted different market sectors, a new company, Intuit (NASDAQ: INTU), has managed to win a share of the lucrative small-business sector with its popular Turbo Tax and QuickBooks business software. While this directly affects Paychex, whose market is small and medium-sized businesses, ADP may also find itself challenged by Intuit in the future as it aims to get a bigger share of the markets.
The Bottom Line
Dividends are key for investors to build their wealth over the long term, since these provide capital that they can reinvest further to develop their portfolio holdings. Automatic Data Processing fits all the criteria of a good dividend stock, including healthy financials, a long history of increasing its dividends as well as of paying dividends to investors on a regular basis, and a sensible dividend payout ratio that does not overwhelm earnings. And its current share price of $69.81 has increased by some 34% from last year. Hence, defensive investors who want a safe stock to add to their portfolio should definitely buy into Automatic Data Processing.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.