I use a set of guidelines that I codified over the last few years to review the companies in The Good Business Portfolio (my portfolio) and other companies that I am taking a look at. For a complete set of the guidelines, please see my article " The Good Business Portfolio: Update To Guidelines and July 2016 Performance Review". These guidelines provide me with a balanced portfolio of income, defensive, total return and growing companies that keeps me ahead of the Dow average.
I have been writing articles on dividend kings and single symbol letter companies to find some new investment ideas for the portfolio. Each study found 2-3 interesting companies, but now it's time to spend some time on the other companies in the portfolio to see if any should be sold to make room for better investments. So far there is one sell Cabela's (NYSE:CAB) and one trim Harley-Davidson (NYSE:HOG) using covered calls to gain a couple of points. Also reviewed were Omega Health Investors (NYSE:OHI) as buy more, Texas Instrument (NYSE:TXN) as hold, Digital Reality Trust (NYSE:DLR) as buy more and Philip Morris International (NYSE:PM) as hold.
This article is about Automatic Data processing Inc. (NASDAQ:ADP) that is 4.7% of The Good Business Portfolio. The position is above a full position of 4%. The question is should the portfolio buy/hold/sell ADP. Automatic Data processing Inc. provides a large range of data processing and human resource services. Fundamentals of Automatic Data processing Inc. will be looked at in the following topics to help make the decision to hold or sell. The Good Business Portfolio Guidelines, Total Return And Yearly Dividend, Last Quarter's Earnings, Company Business Overview, and Takeaways And Recent Portfolio Changes.
Good Business Portfolio Guidelines.
Automatic Data processing Inc. passes 10 of 11 Good Business Portfolio Guidelines. These guidelines are only used to filter companies to be considered in the portfolio. Some of the points brought out by the guidelines are shown below.
The Good Business Portfolio is based on the fact that it does not follow any one type of investment income, growth, value, and total return. Automatic Data processing Inc. is intended to be in the steady income group.
Automatic Data processing Inc. is a large-cap company with a capitalization of $41.1 Billion. This size will allow Automatic Data processing Inc. the ability expand its business as more and more workers return to the work force. The next biggest company in this sector is Paychex Inc. (NASDAQ:PAYX) at half the size of ADP and does not have the wide broad range of products of ADP.
Automatic Data processing Inc. has a dividend yield of 2.5% which is about average for the market. The ADP dividend has been increased for 42 years making it a dividend aristocrat and its dividend is very safe. Automatic Data processing Inc. is therefore a good choice for the dividend income investor. After paying its average dividend there is still cash remaining for investment in business expansion.
Automatic Data processing Inc. last quarter earnings should increase when interest rates are increased, allowing the company to make money on the payroll float. Automatic Data processing Inc. has a yearly positive total cash flow of $1.8 Billion. This good cash flow makes the dividend very safe with room for increases each year.
I also require the CAGR going forward to be able to cover my yearly expenses. My dividends provide 3.2% of the portfolio as income and I need 1.9% more for a yearly distribution of 5.1%. Automatic Data processing Inc. has a good three-year CAGR of 11.0% easily meeting my requirement. This good future growth for Automatic Data processing Inc. can continue the uptrend benefiting from the increased float from higher interest rates and the growth of the working population.
Looking back five years $10,000 invested five years ago would now be worth over $22,600 today. This makes Automatic Data processing Inc. a good investment for the growth investor looking back, that has future growth as the work force increases and new products are introduced.
Automatic Data processing Inc. S&P Capital IQ rating is two stars or sell with a target price of $85.0. Automatic Data processing Inc. is 5% over priced at present compared to the target. ADP is a fair buy at the present price for the patient long term investor that wants a steady income, but waiting for a better entry price is up to your goals.
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. beat the Dow baseline in my 46.6 month test compared to the Dow average. I chose the 46.6. month test period (starting January 1, 2013 and ending to date) because it includes the great year of 2013, and other years that had fair and bad performance. The total return of 73.43% makes Automatic Data processing Inc. appropriate for the growth investor. YTD total return for Automatic Data processing Inc. is good at 11.41%, above the market by 4% short term. Automatic Data processing Inc. Has increased its dividend for 42 years and presently has a yield of 2.5% which is good for the income investor. Automatic Data processing Inc. just declared its dividend increase and the quarterly dividend was increased from $0.53 to $0.57 or about 7.5%.
DOW's 46.6 month total return baseline is 44.00%
46.6 Month total return
Difference from DOW baseline
Yearly Dividend percentage
Automatic Data processing Inc.
As seen in the 5 year price chart below Automatic Data processing Inc. has a good chart over 2012-2016 YTD, that shows a great total return in a good year like 2013 and moderate growth from there to date with growth to come as the interest rates increase.
Last Quarter's Earnings
For the last quarter on November 2, 2016 Automatic Data processing Inc. reported earnings that were well above expected at $0.86 compared to last year at $0.68 and expected of $0.75. Total revenue was higher at $2.92 Billion and higher than a year ago by 7.7% year over year that was in line with expected revenue. This was a good report with bottom line increasing as top line top line increased showing the growth of the business. The next earnings will be out early February 2017 and estimated at $1.28 compared to last year of $1.17 . This leaves cash available for dividend increases and business expansion.
Automatic Data Processing, Inc. is a provider of human capital management (NASDAQ:HCM) solutions to employers, offering solutions to businesses of various sizes. The Company also provides business process outsourcing solutions. Its segments include Employer Services and Professional Employer Organization (NYSE:PEO) Services. The Employer Services segment offers a range of human resources (NYSE:HR) business process outsourcing and technology-enabled HCM solutions. These offerings include payroll services, benefits administration, talent management, HR management, time and attendance management, insurance services, retirement services, and tax and compliance services. ADP TotalSource, ADP's PEO business, offers small and mid-sized businesses a HR outsourcing solution through a co-employment model. As a PEO, ADP TotalSource provides HR management services while the client continues to direct the day-to-day job-related duties of the employees.
Over all Automatic Data processing Inc. is a good business with 11% projected revenue growth as the interest rates go up. The good cash flow provides ADP the capability to continue its moderate growth. The economy is showing moderate economic (about 2%) growth right now and the FED may raise rates in December 2016 but is dependent on the United States economy. I believe the FED, when it does raise rates it will be a one and done, they don't want to trigger a slowdown in the economy. As employment increases with the economy ADP should grow with it.
At the last earnings call Mr. Carlos A. Rodriguez (Chief Executive Officer) said "Our results this quarter reflect the strength of our business model and give us momentum as we stay focused on delivering an outstanding client experience through great service and innovative solutions, many of which are receiving a wealth of external recognition. Recently, we shared that ADP was named a Leader in Payroll Business Process Outsourcing by Gartner for the fifth consecutive year. Gartner's study analyzed vendors across all regions, employer sizes and service delivery models, evaluating both their ability to execute and completeness of vision".
Takeaways and Recent Portfolio Changes
Automatic Data processing Inc. is an investment choice for the income investor and moderate growth investor with its 2.5% yield and great total return. Automatic Data processing Inc. is 4.7% of The Good Business Portfolio and its position will be held as we watch to see what the rates going forward are. ADP will benefit from the rate increases as it makes money on the customer float. ADP is a solid, moderate income producer with potential for upward earnings growth as the company introduces new products.
Trimmed Cabela's from 3.7% of the portfolio to 3.5%, they have received a bid of $65.50 cash for their shares, which to me is a fair price. I want to take a bit off the table in case the deal does not go through. I also would like to deploy the proceeds to increase the dividend paying companies in the portfolio. The last earnings report was not good and it may be time to take a good profit while I can in case the deal does not go through. Management is spending too much money to keep revenue up causing earnings to decrease.
Sold covered calls (December 2nd $58.0 strike price) on a portion of the HOG position to make some money while I wait for the buyout or something to make me want to trim the position.
Sold covered calls (December 9th $54.5 strike price) on a portion of the HOG position to make some money while I wait for the buyout or something to make me want to trim the position.
Increased position in Digital Investors Trust to 1.00% of the portfolio to take advantage of the recent dip to add to the position of a long term growth company.
Increased Omega Healthcare Investors from 4.7% of the portfolio to 4.8% of the portfolio, I needed a little more income and OHI will give that to the portfolio. The portfolio will fill in the open portfolio slot with Kellogg (NYSE:K) when cash is available followed by PepsiCo Inc. (NYSE:PEP) when the next slot is open.
The Good Business Portfolio generally trims a position when it gets above 8% of the portfolio. The four top positions in The Good Business Portfolio are, Johnson and Johnson (NYSE:JNJ) is 8.2% of the portfolio, Altria Group Inc. (NYSE:MO) is 7.4% of the portfolio, Home Depot (NYSE:HD) is 7.6% of portfolio and Boeing (NYSE:BA) is 8.7% of the portfolio, therefore JNJ and BA are now in trim position with Home Depot and Altria getting close.
Boeing is going to be pressed to 10% of the portfolio because of it being cash positive on individual 787 plane costs at $151 Million in the third quarter. The recent earnings blew away the estimate of $2.63 and came in at $3.51. BA has just received a large order for 15 747-8 planes which will help keep this line open. BA is a long term buy and has a backlog of over 7 years.
JNJ will be pressed to 9% of the portfolio because it's so defensive in this post BREXIT world. Earnings in the last quarter beat on the top and bottom line but Mr. Market did not like growth going forward. JNJ is not a trading stock but a hold forever, it is now a strong buy as the healthcare sector was under pressure from the election.
For the total Good Business Portfolio please see my recent article on The Good Business Portfolio: 2016 Second-Quarter Earnings and Performance Review for the complete portfolio list and performance. Become a real time follower and you will get each quarters performance after the earnings season is over. Third-quarter earnings and performance with be available in a few weeks after HP Inc. (NYSE:HPQ) reports earnings.
I have written individual articles on CAB, JNJ, EOS, GE, IR, MO, BA, Omega Health Investors, Texas Instrument , Digital Investors Trust and Home Depot 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 BA, JNJ, HD, OHI, MO, HOG, PM, IR, TXN, CAB, DLR, ADP.