Wednesday, February 6, 2008

watching ADP...

In the midst of this market sell off there are several stocks that have surpased their 52 week low or are bumping off that low. With a constant eye to my watch list, this is one of the stocks which has drawn my focus:

Automatic Data Processing (ADP)
For those of you who aren't familiar with ADP, they might be the people who pay you every two weeks. ADP is a provider of business outsourcing solutions. The company you work for may outsource their payroll or even their tax and benefits administration to ADP. They are also a leading provider of integrated computing solutions to several vehicle dealers throughout the world. These are businesses with very predictable cash flow, and high barriers to entry. Each of the markets and businesses that ADP operates in, globally and in the United States, are expected to grow quickly over the next several years.

ADP has been growing very quickly over the past few years and is expected to continue that growth going forward. Earnings growth in the high teens are a regular occurance for this firm, and their dividend growth has followed suit. ADP has paid dividends since 1974, and their dividend growth has been very solid. The dividend has actually doubled since 2004, and their latest increase was a very strong 26%.

Valuation
The stock is currently sitting at a multi year low of $37.91. From a technical perspective though, the stock chart looks scary as it seems to have broken dow to uncharted territory. The last time this stock looked this good was back in 2003 when it traded down to $32. ADP has traditionally always demanded a premium P/E, which I believe is warranted due to the company's market position, high growth rate, strong return on equity, and low debt.

I have my eye on this one as I believe the fear of many jobless Americans has investors selling this one hand over fist. The opportune time to buy into ADP is when fears of a high unemployment rate loom. The current P/E of around 19x marks a 10 year low level. The stock is yielding 3% which is unheard of for ADP shares as well. I always get really interested when I see a big recent dividend raise coupled with a low stock price....

Post Sponsor: Need to raise some finance from your home? A no obligation refinance application from Rebuild.org will offer you up to 4 different quotes.

8 comments:

Dividends4Life said...

Thanks for the tip. This one looks like it would be interesting to dig into.

Best Wishes,
D4L

pitz said...

Watch/study the credit and counterparty risk associated with this stock. I haven't personally studied the balance sheet in detail to see how much operating leverage they have, but some of their assets look like they could be infected with toxic stuff.

MG said...

pitz, The have virtually do debt. I'm not sure where they have their money invested though..

pitz said...

No debt? They have debt in the form of short-term obligations to their clients' employees.

A more detailled discussion is at FWF, but basically, they haven't come completely clean on where they have invested clients' funds temporarily.

MG said...

It doesn't concern me too much. I hope they have some bad investments, it'll only be a short term issue in the grand scheme of things.

augustabound said...

"No debt? They have debt in the form of short-term obligations to their clients' employees."

Doesn't the business need to have funds transfered to ADP before the employees are paid? Most businesses are on a "week behind" pay schedule, leaving the week from the end of the pay period until the pay day for clerical/accounting work to be done.

Jake (Dividend Investing Blog) said...

ADP has been at the bottom of my Thoroughbred Folio, which tracks the top 40 Dividend Aristocrats. That has raised my eyebrows as well. Good article, thanks.

Anonymous said...

No debt? They have debt in the form of short-term obligations to their clients' employees.

I work for ADP and can assure you personally there is a large trust accounting division that manages its float.

ADP is one of only 7 corporations in the world with triple-A credit ratings with both S&P and D&B.