A detailed quantitative analysis by Automatic Data Processing Inc. (ADP) is linked here. Below are some highlights from the analysis linked above:
Company description: Automatic Data Processing Inc., one of the world’s largest independent computer services companies, provides a wide range of data processing services.
Fair value: When calculating the fair value, I take into account the differential fair value of the present value MMA along with these four fair value calculations. A detailed description can be found on page 2 of the linked PDF:
1. Avg. High yield price
2. 20-year DCF award
3. Avg. P / E price
4. Graham Number
ADP trades at a premium to all four of the above ratings. Including the NPV MMA differential, the stock is trading at a premium of 7.8% over the calculated fair value of $ 175.78. ADP did not receive any stars in this area.
Dividend analytical data: There are three possible stars and three key metrics in this section. A detailed description can be found on page 2 of the linked PDF:
1. Free cash flow payout
2. Debt to total capital
3. Key Metrics
4. Dividend Growth Rate
5th years Div. growth
6. Rolling 4 year old Div. > 15%
ADP earned a star for 2.) above in this section. The stock earned a star because its recent debt to total capital was less than 45%. The company has paid a cash dividend to shareholders every year since 1974 and has increased its dividend payments for 45 consecutive years.
Dividend Income vs. MMA: Why would you take the equity risk and invest in a dividend stock when you could get a better return on a much less risky money market account (MMA) or a government bond? This section compares that stock’s earning power to a High performance MMA. There are two points covered in this section. A detailed description can be found on page 2 of the linked PDF:
1. NPV MMA Diff.
2. years to> MMA
ADP received a star in this area for its NPV MMA Diff. of $ 556. That amount exceeds my target of $ 500 for a stock that has increased dividends as long as ADP has done so. If ADP increases its dividend to 9.0% per year, it will take 5 years to reach an MMA with an estimated 20-year average rate of 2.74%.
Peers: The company’s peer group includes: Paychex, Inc. (PAYX) with a yield of 2.6%, Insperity, Inc. (NSP) with a yield of 1.9% and Convergys Corporation (CVG) with a yield of 0.0%.
Conclusion: ADP did not deserve any stars in the Fair Value category, one star in the Dividend Analytical Data category and one star for a total of two stars in the Dividend Income vs. MMA category. This classifies ADP quantitatively as 2 star weak Warehouse.
With my D4L-PreScreen.xls Model, I found that the stock price would have to rise to $ 196.39 before ADP’s NPV MMA differential dropped to the minimum of $ 500 that I’m looking for for a stock with 45 years of consecutive dividend increases. At that price, the stock would return 1.9%.
Resetting the D4L-PreScreen.xls Model and solution for the dividend growth rate required to generate the targeted MMA differential of $ 500 NPV. The calculated rate is 8.7%. This dividend growth rate is below the 9.0% used in this analysis, thus providing a margin of safety. ADP has one Risk assessment of 1.25, which it classifies as a low risk stock.
As an industry leader, ADP enjoys economies of scale, a respected brand and protected by high customer switching costs. Financially, the company has a good record with debt to total capital of 29% (versus 52%) well below my desired maximum and a recurring source of income that generates steady cash flow. The free cash flow payout of 62% (versus 58%) is slightly above my maximum of 60%. The stock is trading above its calculated fair value of $ 175.78.
Disclaimer: The material presented here is for informational purposes only. The above quantitative stock analysis, including the star rating, is mechanically calculated and based on historical information. The analysis assumes that the share will develop in the future as it has in the past. In general, this is never true. Before buying or selling stocks you should do your own research and arrive at your own conclusion. Please see my disclaimer for more information.
Full disclosure: At the time of this writing, I had no position in ADP (0.0% of my dividend growth portfolio).
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Tags: ADP, PAYX, NSP, CVG,