Company Description: Automatic Data Processing Inc. is one of the world's largest independent computing services companies, providing a broad range of data processing services.
Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:
1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number
ADP is trading at a premium to all four valuations above. The stock is trading at a 14.9% premium to its calculated fair value of $41.73. ADP did not earn any Stars in this section.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%
ADP earned three Stars in this section for 1.), 2.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. ADP earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1974 and has increased its dividend payments for 36 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
1. NPV MMA Diff.
2. Years to > MMA
ADP earned a Star in this section for its NPV MMA Diff. of the $867. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as ADP has. If ADP grows its dividend at 7.0% per year, it will take 2 years to equal a MMA yielding an estimated 20-year average rate of 3.6%. ADP earned a check for the Key Metric 'Years to >MMA' since its 2 years is less than the 5 year target.
Memberships and Peers: ADP is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index and a Dividend Champion. The company's peer group includes: Paychex Inc. (PAYX) with a 4.6% yield, Insperity, Inc. (NSP) with a 2.7% yield, and Convergys Corporation (CVG) with a 0.0% yield.
Conclusion: ADP did not earn any Stars in the Fair Value section, earned three Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of four Stars. This quantitatively ranks ADP as a 4 Star-Strong stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $56.74 before ADP's NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 36 years of consecutive dividend increases. At that price the stock would yield 2.7%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 5.3%. This dividend growth rate is lower than the 7.0% used in this analysis, thus providing a margin of safety. ADP has a risk rating of 1.25 which classifies it as a Low risk stock.
While a weak economy and low employment levels have negatively impacted ADP, the company enjoys a scale advantage as the industry leader leader and has a well-respected brand. These along with high customer switching costs has provided ADP with a serviceable moat. Although the company is trading in excess of my $41.73 fair value price, it recently moved up to a 4-Star stock as a result of updated financials an an increased dividend. It is one I will continue to watch for opportune times to increase my position.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I was long ADP (0.7% of my Dividend Growth Portfolio) See a list of all my dividend growth holdings here.
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