Friday, October 5, 2012

Automatic Data Processing Stock Analysis

Automatic Data Processing, Inc. (ADP) provides business outsourcing solutions. The company operates in three segments: Employer Services, Professional Employer Organization (PEO) Services, and Dealer Services. The company is a member of the dividend aristocrats’ index, has paid dividends since 1974 and increased them for 37 years in a row. The company’s last dividend increase was in November 2011 when the Board of Directors approved a 9.70% increase to 39.50 cents/share. The company’s largest competitors include Paychex (PAYX), Convergys Corp (CVG) and CSG Systems (CSGS). Over the past decade this dividend growth stock has delivered an annualized total return of 7.80% to its shareholders.

The company has managed to an impressive increase in annual EPS growth since 2003. Earnings per share have risen by 5.90% per year. Analysts expect Automatic Data Processing to earn $2.93 per share in 2013 and $3.20 per share in 2014. In comparison Automatic Data Processing earned $2.82/share in 2012.
The company has consistently repurchased stock over the past 7 years, reducing its share count from 620 million shares in 2002 to 489 million in 2012.

The return on equity has increased from 19% to 23%. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.
The annual dividend payment has increased by 13.40% per year over the past decade, which is higher than the growth in EPS. The expansion in the dividend payout ratio allowed the company to raise distributions at a rate that is higher than earnings.
A 13% growth in distributions translates into the dividend payment doubling almost every five and a half years. If we look at historical data, going as far back as 1986 we see that Automatic Data Processing has actually managed to double its dividend every five years on average. The dividend payout ratio increased from 28.60% in 2003 to 55% in 2012. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.
Currently, Automatic Data Processing is attractively valued at 20.50 times earnings, has an adequately covered dividend and yields 2.70%. I would consider adding to my position in the stock subject to availability of funds.

 Full Disclosure: Long ADP

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Dividend Aristocrats List for 2012

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