Company Description: Automatic Data Processing Inc., one of the world's largest independent computing services companies, provides 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 discount to only 3.) above. Since ADP's tangible book value is not meaningful, a Graham number can not be calculated. When also considering the NPV MMA Differential, the stock is trading at a 8.8% premium to its calculated fair value of $195.25. 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 one Star in this section for 1.) 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 company has paid a cash dividend to shareholders every year since 1974 and has increased its dividend payments for 47 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
The NPV MMA Diff. of the $429 is below the $500 target I look for in a stock that has increased dividends as long as ADP has. If ADP grows its dividend at 9.6% per year, it will take 8 years to equal a MMA yielding an estimated 20-year average rate of 3.75%.
Peers: The company's peer group includes: Paychex, Inc. (PAYX) with a 3.4% yield and Insperity, Inc. (NSP) with a 2.1% yield.
Conclusion: ADP did not earn any Stars in the Fair Value section, earned one Star in the Dividend Analytical Data section and did not earn any Stars in the Dividend Income vs. MMA section for a total of one Star. This quantitatively ranks ADP as a 1-Star Very Weak stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $204.42 before ADP's NPV MMA Differential increased to the $500 minimum that I look for in a stock with 47 years of consecutive dividend increases. At that price the stock would yield 2.1%.
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 9.9%. This dividend growth rate is above than the 9.6% used in this analysis, thus providing no margin of safety. ADP has a risk rating of 1.25 which classifies it as a Medium risk stock.
As the industry leader ADP enjoys advantages of scale, a respected brand and protected by high customer switching costs. Financially, the company has a good balance sheet, with a debt to total capital of 47% (up from 44%), which is slightly above my desired 45% maximum, and a recurring revenue stream generating steady cash flows. Its free cash flow payout of 54% (down from 76%) is below my maximum of 60%. The stock is trading above its calculated fair value of $195.25.
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 held no position in ADP (0.0% of my Dividend Growth Portfolio).
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