Does Bill Miller Think ADP Is Attractive?

Bill Miller seems befuddled. In his July 2010 commentary, he wonders why investors keep purchasing 10-year treasuries yielding about 3%, when companies like ExxonMobil offer much higher potential returns.

His formula for Exxon is straightforward: "A sum of the dividend yield, growth rate and share shrink could represent an attractive annual return even if the valuation stays the same, and the valuation is among the lowest the company has traded at in years." When you add up the components, Exxon could offer 16.4% returns per year in a low-return environment.

I'm no less baffled than Miller by investors' preference for bonds, but I do think he's on to something. To see whether more Miller-like opportunities like Exxon were out there, I looked for companies with:

• A dividend yield greater than the 3% 10-year treasury yield
• A five-year track record of dividend growth
• A history of repurchasing shares
• A P/E less than 25

Here's what I found:

Company	Yield	5-Year Dividend Growth	Share Shrink	P/E
Automatic Data Processing (Nasdaq: ADP  )	3.3%	17.4%	1.3%	17.3
Total System Services (NYSE: TSS  )	1.8%	9.2%	0.0%	13.7
Intuit (Nasdaq: INTU  )	0.0%	0.0%	5.1%	25.8

Source: Capital IQ, a division of Standard and Poor's.

From the table above, Automatic Data Processing fits Miller's criteria perfectly. It pays a 3.3% dividend that has been growing 17.4%, on average for the past five years. The company also trades at just more than 17 times earnings, and it produces plenty of cash flow to repurchase shares. Total System Services looks interesting, but its yield is too low for this exercise. Intuit doesn't pay a dividend yet.

The Foolish bottom line
Would Bill Miller consider investing in ADP? It meets all the criteria above, and it could offer a 22% return over time -- although it will be hard for the company to maintain such a high dividend growth rate. In today's low-return environment, that's pretty attractive. I don't know why the market is offering up this opportunity, but as long as it is, ADP could be worth pursuing further.