Recession Performance
Another quality ADP possesses that make it an appealing long-term dividend investment is its recession-resistant business model. Even when the global economy enters recession, employers still need the payroll and human resource management services that ADP provides. This sufficiently insulates ADP from the ravaging effects of a deep recession, such as the one the U.S. experienced in 2008 and 2009.
For example, in 2008 ADP grew earnings per share by 20%. This was a notable achievement, as it was very rare for any large company in the S&P 500 to post such a high rate of earnings growth. Then, ADP grew earnings by 8.6% in 2009. From 2007-2010, ADP generated 31% earnings growth. The company’s earnings-per-share over the great recession are shown below:
– 2007 earnings-per-share of $1.83
– 2008 earnings-per-share of $2.20
– 2009 earnings-per-share of $2.39
– 2010 earnings-per-share of $2.39
Valuation & Expected Total Returns
ADP’s future shareholder returns will be a function of its earnings and dividend growth, along with any changes in its valuation. The current dividend yield of 2.7% plus 7% to 9% expected earnings growth leads to an implied future return of 9.7% to 11.7% per year, before changes in the valuation multiple.
Since 2000, ADP stock has traded for an average price-to-earnings ratio of 24. The company is currently trading for a price-to-earnings ratio of 26. The company appears a bit overvalued given its historical price-to-earnings ratio.
The S&P 500 is currently trading for a price-to-earnings ratio of 24.6. ADP is trading a bit above the S&P 500’s price-to-earnings ratio. This should be expected, as the company’s solid growth prospects and stability command a premium over the ‘average’ S&P 500 stock.
Considering the above, ADP is likely trading around fair value in today’s market given the elevated level of the S&P 500.
Final Thoughts
Automatic Data Processing (NASDAQ:ADP) is a highly profitable company with a strong business model and many competitive strengths. It also has a strong balance sheet, and garners an excellent ‘AA’ credit rating from Standard & Poor’s. This provides investors with a considerable safety.
Because ADP’s future earnings growth forecasts are roughly in-line with the S&P 500’s, investors may want to wait for a better valuation before buying ADP stock. Compression of ADP’s valuation multiple would negatively impact future returns for shareholders who buy at the current price.
ADP currently has a slightly below average ranking using The 8 Rules of Dividend Investing. The company’s fairly high valuation multiple holds the company back from ranking higher.
While value investors may quibble with ADP’s current valuation, ADP is a high quality business that will very likely continue to reward shareholders with rising dividends. The company makes a compelling long-term hold in a dividend growth portfolio – especially for investors looking for exposure to the notoriously fickle information technology sector.
Note: This article is written by Bob Ciura and was originally published at Sure Dividend.
Additional Links:
(1) http://us.spindices.com/indices/strategy/sp-500-dividend-aristocrats
