This article is about Automatic Data Processing Inc. (NASDAQ:ADP) and why it's a dividend growth investment that's 4.61% of The Good Business Portfolio. Automatic Data Processing is a provider of human capital management (HCM) solutions and business process outsourcing. ADP, with 41 years of dividend increases and the largest in capitalization in the human resources business, is a good dividend growth company. The unemployment rate is at a seven-year low of 253K and with the interest rates being raised slowly by the Fed, ADP will continue its steady earnings growth. ADP is a stable business with the fundamentals being discussed in this article.
Good Business Portfolio Guidelines
Automatic Data Processing passes 10 of 10 Good Business Portfolio Guidelines. These guidelines are only used to filter companies to be considered in the portfolio. For a complete set of the guidelines, please see my article "The Good Business Portfolio: All 24 Positions." These guidelines provide me with a balanced portfolio of income, defensive, momentum, and growing companies that keeps me ahead of the Dow average.
Automatic Data Processing Inc. is a large-cap company with a capitalization of $42.0 billion. The large size of ADP gives it the muscle plus its cash flow to increase the business going forward. The foreign part of ADP, about 20% of the company, has growth opportunities for expansion of the business. The nearest competitor is Paychex (NASDAQ:PAYX) at a capitalization of $19.6 billion, about half the size of ADP.
Automatic Data Processing Inc. has a dividend yield of 2.50% which is average for the market. The dividend has been increased for 41 years in a row making ADP a dividend aristocrat and its dividend is very safe. ADP is therefore a good choice for the dividend growth investor. The average payout ratio is good at 60% over the past five years. After paying the average dividend this leaves plenty of cash remaining for investment in new company purchases and business expansion.
The company's cash flow is good at $1.65 billion which leaves enough cash after paying its average dividend for normal business expansion. ADP has good balance between paying a dividend and keeping enough cash to expand the business.
I also require the CAGR going forward to be able to cover my yearly expenses. My dividends provide 3.1% of the portfolio as income and I need 1.9% capital gain in addition for a yearly distribution of 5%. Automatic Data Processing Inc. has a three-year CAGR of 12%, well above my overall requirement. Looking back five years, $10,000 invested five years ago would be worth $22,700 today (from S&P Capital IQ). This makes Automatic Data Processing Inc. a good investment for the dividend growth investor with the average dividend and steady, above average growth.
S&P Capital IQ has a three-star rating or hold on the stock with a price target of $85.00. This makes ADP fairly priced at present. In the long term its above average CAGR of 12% and its business in the rising employee market make the company a good investment that pays a good dividend and has moderate steady growth to let you sleep well at night.
Total Return and Yearly Dividend
The Good Business Portfolio Guidelines are just a screen to start with and not absolute rules. When I look at a company, the total return is a key parameter to see if it fits the objective of The Good Business Portfolio. Automatic Data Processing Inc. had slightly lower total return than the Dow baseline in my 39.5-month test period. I chose the 39.5-month test period (starting January 1, 2013) because it includes the great year of 2013, the moderate year of 2014, the small loss year of 2015 and the slightly positive year of 2016 YTD to see how the company does in good and bad markets. I have had comments about why I do not compare the total return to the S&P 500 average. I use the Dow average because the Good Business Portfolio has six Dow companies in it and is weighted more to the Dow average than the S&P 500. Modeling the Dow average is not an objective of the portfolio but just happened by using the 10 guidelines as a filter for company selection. The dividend is at 2.50% and has been increased for 41 years. This slightly underperforming total return and average dividend makes Automatic Data Processing Inc. appropriate for the dividend growth investor. YTD total return is 6.6% beating the Dow after the first interest rate rise, and more is yet to come as rates rise slowly.
Dow's 39.5-month total return baseline is 34.14%.
39.5 Month total return
Difference from DOW baseline
Yearly Dividend percentage
Automatic Data Processing Inc.
Last Quarter's Earnings
For the last quarter ADP reported earnings on February 3, 2016 that met expectations at $0.72 compared to last year's $0.70 vs. an expected $0.72. Revenue increased 5.6% to $2.81 billion. This was a fair report showing the result of a slowly improving economy. Earnings for the next quarter will be released in late April and are expected to be at $1.18 compared to the last year's $1.04. Management guided forward for 12%-14% earnings growth for the next fiscal year. ADP also is returning value to shareholders by its repurchase of $750 million shares.
Automatic Data Processing, Inc. is a provider of human capital management solutions and business process outsourcing. The company operates through two segments: Employer Services and Professional Employer Organization (PEO) Services. The Employer Services segment offers a range of business outsourcing and technology-enabled HCM solutions. These offerings include payroll services, benefits administration, recruiting and talent management, human resources management, insurance services, retirement services and payment and compliance solutions. The company's PEO business, ADP TotalSource, offers small and mid-sized businesses human resources (HR) outsourcing solution through a co-employment model. ADP TotalSource includes HR management and employee benefits functions, HR administration, employee benefits and employer liability management into a single-source solution. The 12% projected growth each year and the opportunity to buy other companies allows ADP the capability to continue its strong growth up cycle. Also the business grows with the economy, which is growing slowly and with interest rates being raised by the Fed, this should help the bottom line as ADP makes more money on its float in the payroll business.
Takeaways And Recent Portfolio Changes
Automatic Data Processing Inc. is a good Dividend Growth choice considering its 41 years of dividend increases and average dividend of 2.5%. Also it has a 12% CAGR going forward, a very strong growth prospect. The Good Business Portfolio has a full position of 4.61% of the portfolio and will let it grow until it hits 8% of the portfolio, and then it's trim time. If you don't already have a position in the human resources sector, ADP may be worth a position for the dividend growth segment of your portfolio.
Bought Some more Omega Health Investors (NYSE:OHI), now at 3.7% of The Good Business Portfolio. I intend to keep adding to OHI until it's 4% of the portfolio and watch it grow. The dividends are being reinvested in shares of OHI. OHI just increased its dividend by $0.01/quarter or 1.8% for a yearly increase of 7.2% if these quarterly increases continue. From the last earnings report OHI has a FFO of $0.72 giving it the ability to increase the dividend for many quarters to come.
Trimmed NVS to 0.8% of the portfolio. Its growth and projections going forward do not look promising.
Started a small position in Hormel Food Corporation (NYSE:HRL) at 0.3% and will see what the next quarter brings before increasing the position.
The Good Business Portfolio generally trims a position when it gets above 8% of the portfolio. Home Depot (NYSE:HD) is 8.4% of portfolio, Johnson & Johnson (NYSE:JNJ) is 8.4% of the portfolio, Altria Group Inc.(NYSE:MO) is 7.4% of the portfolio, Boeing (NYSE:BA) is 7.9% and L Brands (NYSE:LB) is 6.3% of the portfolio, therefore HD and JNJ are now in trim position with Altria Group Inc., L Brands Inc. and Boeing getting close. Boeing is going to be pressed to 10% of the portfolio because of it being cash positive on individual 787 plane costs, announced in the last quarter earnings call.
See my recent article on 2015 fourth-quarter performance for the complete portfolio list and performance. Become a follower and you will get each quarter's performance after the earnings season is over.
I have written individual articles on CAB, JNJ, EOS, LB, GE, IR, MO, BA, Omega Health Investors and HD that are in The Good Business Portfolio and other companies being evaluated by the portfolio. If you have an interest please look for them in my list of previous articles.
Of course this is not a recommendation to buy or sell and you should always do your own research and talk to your financial advisor before any purchase or sale. This is how I manage my IRA retirement account, and the opinions on the companies are my own.
Disclosure: I am/we are long ADP, HD, MO, BA, OHI, JNJ, HRL, LB.
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.