Dividend Farming Scorecard: Automated Data Processing Inc. (ADP)

One firm of interest to me for several years because of its position in the payroll process arena is Automated Data Processing (ADP).  I’ve looked at it more than once but have not added ADP to the Dividend Farm for various reasons.  It’s been a while since I last reviewed it and decided now would be as good a time as any to take another look.

The table below provides a snapshot of the factors I consider when looking at possible adds to the farm.  The metrics for ADP as of market close on September 13, 2019, are depicted in the right-hand column.  Formatting critical items in this way helps me analyze my options comparing pros and cons against target metrics and alternative investments.

FACTOR	METRICS	ADP
CCC List	Champion	Champion
Current Yield	4.0%	1.86%
Company Profile	Red Flags?	Outsourced HR and payroll services.
Industry Leadership	Top 10	#1 in U.S.
Market Cap	$10 B+	$69.3  B
P/E	< 20	30.4
P/B	< 2	12.8
Debt / Equity	< 1	6.7
Dividend History (Years)	25	44
12 Month Price Range	Lower Half	Top Half
Dividend Payout Ratio	< 75%	58.4%
Portfolio Weight	Slightly Over	Under

CCC List: The DRIPinvesting.org web site provides the list of Champions, Contenders, and Challengers which is where I normally start.  ADP industries has a substantial record as a Dividend Champion which bodes well out of the gate. 

Current Yield:  ADP’s yield is 1.86% which is less than half my target.  It’s grown its dividend at a double-digit rate for the past 10 years, but it would take 7 more years at that rate to double the yield assuming the price remains constant.

Company Profile:  ADP previously specialized in outsourced payroll services and has since expanded to include a variety of human resource (HR) services in addition to payroll processing.

Industry Leadership:  Forbes indicated ADP was one of the two largest human resource outsourcing (HRO) firms in the U.S. eclipsing the number 2 provider Paychex by a considerable margin.  If you’re going to invest, doing so in a 1 or a 2 isn’t a bad way to start.

Market Capitalization:  Market cap for ADP is approaching $70 B making it 7x larger than my minimum target threshold.  Size means stability so that’s a positive. 

Price to Earnings:  The trailing P/E of 30.4 is 50% higher than my upper limit.  In my opinion the greater the spread between price and earnings the more distance there is between risk and reward.  At some point the gap becomes too wide.  I believe ADP is past that point.

Price to Book:  P/B is 12.8 relative to my target of 2.  Another way to look at is to say that investors are paying $12.80 to own $1.00 in tangible business value.  I’m not in the market for blue sky, let alone square miles of it.

Debt to Equity:  Debt is nearly 7x the equity in the firm.  I’m not sure what else to say but, no thank you.

Dividend History:  A dividend growth history of 44 years is great.  The dividend growth rate, as noted above, has been in the double-digit range, and accelerating, for the past 10 years.  That would be fantastic if the P/E, P/B, and D/E were reasonable.

Price Range:  ADP’s price is in the top half of its trailing 12-month range.  This isn’t bargain territory given the red flag metrics already noted. 

Payout Ratio:  The payout ratio of 58.4% offers considerable headroom supported by a solid growth trend.  However, the price may be outpacing dividend increases.  As a Dividend Farmer I’d rather see cash payments running ahead of price increases the same way a traditional farmer likes to see crop prices rise faster than the value of his land.  It’s easier to pay for essentials with cash than it is market value.

Portfolio Distribution:  ADP would be my only IT sector / outsourcing hold if I were to add it to the farm. Payroll and HR services needs are here to stay, but I question whether the price to pay is worth the cost to play.

Analysis  

ADP missed 5 of my 12 primary benchmarks.  Had it missed only 1 or 2, or even missed the targets it did by slim margins, it may be a possibility.  However, when a company fails to hit nearly 42% of its targets and does so by wide margins, the risk / reward gap becomes too great to add to the Dividend Farm. 

The thoughts and opinions expressed here are those of the author, who is not a financial professional.  Opinions expressed here should not be considered investment advice.  They are presented for discussion and entertainment purposes only.  For specific investment advice or assistance, please contact a registered investment advisor, licensed broker, or other financial professional.

Dividend Farming Scorecard: Altria (MO)

Altria and Philip Morris have been in talks since August about merging their operations after separating roughly a decade ago.  Altria is a Dividend Champion having raised its dividend payments for nearly a half century – 49 years.  MO is also a holding on the Dividend Farm first having been acquired decades years ago and held for the duration.

Given the recent news about MO, its Champion status, and the nature of its business, I decided it was time to build a Scorecard for the firm.

Below is the card for Altria as of September 13, 2019.  The table provides a snapshot of factors being scored.  I’ll be assessing how well MO meets my targets as well as whether or not it provides a better investment fit than alternatives.

FACTOR	TARGET METRICS	LOW
CCC List	Champion	Champion
Current Yield	4.0%	7.34%
Company Profile	Red Flags?	Tobacco, vaping, cannabis, and liquor
Industry Leadership	Top 10	#1 by U.S. market share
Market Cap	$10 B+	$78.8 B
P/E	< 20	12.6
P/B	< 2	5.45
Debt / Equity	< 1	2.8
Dividend History (Years)	25	49
12 Month Price Range	Lower Half	Near 52-week low
Dividend Payout Ratio	< 75%	95.5%
Portfolio Weight	Under to Slightly Over	Slightly Over

CCC List: The DRIPinvesting.org web site provides the list of Champions, Contenders, and Challengers where I normally start.  Altria is a Dividend Champion with nearly 50 years of dividend growth.  It’s a strong record, well above my 25 year target.

Current Yield:  MO’s trailing yield is 7.34% which is well above my desired target by nearly double.  The long-term trend of dividend growth is a high double digit figure and the payments are nice to get.  However, a yield eclipsing 7% can indicate a level of risk that isn’t warranted if the portfolio weight is significant.

Company Profile:  MO has been a cash cow for years.  It has weathered major regulatory, legislative, and public relations storms while continuing to generate a nice dividend.  One may wonder how long that trend can continue as society here and abroad become increasingly health conscious.  MO has been working on non-tobacco diversification, but it’s done so in other areas that may be as risky, if not more so, than tobacco.

Industry Leadership:  MO is the #1 tobacco firm in the U.S. by market share per Motley Fool.

Market Capitalization:  Having a market cap exceeding $78 B means the firm is nearly 8 times my minimum target.  This is great for investment stability even when the price is near its 52-week low. 

Price to Earnings:  The trailing P/E is nearly 40% below my high water mark of 20.  I appreciate ratios below 20.  The price can bump up quite a ways and still be within the bounds, so that’s good.

Price to Book:  The P/B ratio is nearly 2.5x my comfort level.  I don’t mind paying a small premium, but premiums may come with risk.  The bigger the premium the larger the risk it seems. 

Debt to Equity:  Debt to equity is nearly 3x my max.  MO has put a lot of money into new ventures with limited cash flow history e.g., Cronos, making a Farmer wonder if the juice (return) is worth the squeeze (debt).   

Dividend History:  Growing dividends for 49 years is great.  Nearly doubling the minimum Champion range of 25 years speaks volumes about a firm’s consistent ability to throw off cash.  Furthermore, MO has accelerated its dividend growth rate for the past 10 years.  As with nearly all things, acceleration is not infinite.  Growth is an issue to watch. 

Price Range:  The price is within pennies of its trailing 12-month (TTM) low as of this writing.  That could very well be bargain territory, even for those who are risk averse.  However, the value has fallen by nearly one-third during the past year.  A decline like that could be a real bonus to buyers or the harbinger of something bad.  Time will tell.

Payout Ratio:  The payout ratio of 95.5% is beyond my 75% target ceiling.  MO has generated solid earnings with which to support this ratio and done so for a long time.  It stands to reason it will continue doing so over the short run. 

Portfolio Distribution:  MO is a long-time holding for me.  It predates my start as a Dividend Farmer – by decades.  The compound growth associated with reinvested MO dividends has helped bulk up the Dividend Farm, but adding additional weight may not be prudent.

Analysis  

My overall experience with MO has been good – financially.  The dividend history and yield have treated me well as I’ve accumulated a solid position.  The price currently appears favorable, but the price to book, even at a depressed value, is bothersome.  The same is true of the heavy debt incurred by purchasing risky operations.  The public relations and regulatory volatility and uncertainty inherent in the tobacco industry implies a level of risk I may not want if MO were a new add to the farm.  As a current crop, though, I don’t believe I’ll discontinue farming it.  Instead, I’ll look at redirecting MO dividends to other financial crops reducing MO’s weight in the portfolio without incurring selling costs or capital gains taxes through aggressive rebalancing. 

The thoughts expressed here are those of the author, who is not a financial professional.  Opinions should not be considered investment advice.  They are presented for discussion and entertainment purposes only.  For specific investment advice or assistance, please contact a registered investment advisor, licensed broker, or other financial professional.

How a little equals a lot.

It’s not uncommon to hear people say they don’t have any money for investing.  Alternatively, folks may also lament they can’t save enough to make a difference, so why bother.  Are these valid statements?  Possibly.  Then again, potential investors may need only to sharpen their budget pencils or realize how little investments can generate a large return over time.

There are plenty of resources available to help people hone their budgeting skills.  I’m sure I’ll touch on more in this blog in the future.  For today, however, I wanted to look specifically at the power of small dollar amounts working over a long period.

For this exercise, I used Excel’s Future Value (FV) function to look at the difference $25 a month can make.  Why $25?  Because that’s an achievable goal.  Reaching it requires foregoing a couple fancy coffees and one or two fast food lunches each month to save enough to clear the bar.  Over 20 years of working life, the difference in foregoing small expenses may be significant.

In the example below on the left, a new college graduate with $1,000 invests it in a few Dividend Champions yielding 4% annually.  In the example on the right, the new grad’s fellow classmate also puts $1,000 into a mix of Dividend Champions and makes it a habit to save $25 each month.  Each quarter the $75 saved is invested in a Champion.  Both continue their respective tracks for 20 years or 80 quarters.

The way FV formulas work, payments into the formula e.g., initial investment and subsequent quarterly payments, are shown as negative figures (in parentheses) while money received out is recognized as a positive figure. 

The periodic interest rate in this exercise is quarterly and equals an annual rate or dividend yield of 4%.  For example, 4% divided by 4 quarters equals a 1% quarterly rate.

Save $0 / Mos.		Save $25 / Mos.
$       (1,000)	Present Value (PV) Initial Investment	$       (1,000)
1.0%	Quarterly Interest Rate	1.0%
80	Periods	80
$                -	Quarterly Investment	$             (75)
$2,216.72	Future Value (FV)	$11,342.08

The graduate who invested $1,000 in stocks yielding 4% and added nothing to it realized just over $2,200 after 20 years.  Conversely, the student who started with $1,000 and made it a habit to save $25 each month, investing $75 each quarter, finished with over $11,300 during the same period.  The second investor saw her modest nest egg grow to more than 5 times that of her classmate.

Now you may be thinking, “Why bother with $11,000+ over 20 years?”  The answer is this is a conservative scenario.  As people’s careers progress and earnings grow, the amount available to contribute each month grows as well.  Of course, having this money to invest assumes investors are disciplined enough to keep plugging away.

What happens if the average amount an investor can save goes from $25 a month to $100 and she continues to make quarterly purchases?  At the end of 20 years she’ll have over $38,700; more than 17x the size the account her fellow grad has.  What if she does really well, saving an average of $200 each month during the 20 year period, purchasing $600 worth of Dividend Champions each quarter?  She’ll have over $75,000 and a sum nearly 34 times larger than her counterpart.  Is it realistic to save $200 per month?

The median income (half made more, half made less) in the U.S. in 2017 was $31,782.  Saving $200 per month equals $2,400 a year or 7.5% of the total median income.   Although it may be difficult for some to save and invest that much, it’s not impossible for many to manage if they decide their financial future is important enough to work at it.

In the end we all have decisions to make.  For some, the immediacy of a frothy coffee and bagel twice a week is more important than the well-being of their future selves.  For others, the decision is the opposite.  Knowing the long-term effects of persistent saving and investing can make a difference in the decisions we make today and the life we live tomorrow.  This is why it’s important to understand how a little equals a lot. 

The thoughts expressed here are those of the author, who is not a financial professional.  Opinions should not be considered investment advice.  They are presented for discussion and entertainment purposes only.  For specific investment advice or assistance, please contact a registered investment advisor, licensed broker, or other financial professional.