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.