ADP Is Good; Paychex Is Better

One of the great maxims of traders and Wall Street pros is to follow the "smart money."

I'm not much for the thesis that institutional shoppers tend to make smarter investing decisions, but many of you who've read my ruminations on insider buying say you'd also like to know how the Big Money is betting. Your wish is my command.

Next up: Automatic Data Processing (NYSE: ADP  ) . Are institutions bullish or bearish when it comes to this payroll processor?

Foolish facts

Metric

Automatic Data Processing

CAPS stars (out of 5)

****

Total ratings

1,008

Percent bulls

94.5%

Percent bears

5.5%

Bullish pitches

123 out of 136

Highest rated peers

Total System Services, Broadridge Financial Solutions, Fiserv

Data current as of Nov. 29.

If you get a regular paycheck -- and my guess is you do, or else you wouldn't be reading this -- chances are there's a blue stamped "ADP" on the front. ADP and peer Paychex (NYSE: PAYX  ) cut checks on behalf of thousands of the country's largest businesses.

But paychecks are where the story begins with ADP. Other services include human resources and tax and benefits administration. It's a good business model that delivers a steady stream of profits.

"[Earnings per share] has grown nicely in recent years almost solely due to share buybacks. ... It's an interesting way to deliver consistent shareholder return as long as the share price isn't frothy. In other news, ADP has a long history of dividend increases and still sports a conservative payout ratio. Collect the dividend and a reasonable rate of increases on EPS," top CAPS Fool TMFBabo advised in July.

Institutional ownership history

Top Owners

2007*

2008*

2009*

Latest*

Capital Research and Management

28,228,043

57,551,756

54,273,043

43,223,043

BlackRock

1,955,791

2,596,162

22,250,895

21,325,439

Wellington Management

17,631,076

16,715,147

17,559,678

19,840,386

The Vanguard Group

15,858,541

16,943,665

18,057,509

19,579,995

State Street Global Advisors

17,200,521

18,526,467

18,062,367

18,813,074

TOP 25 TOTAL

182,145,717

201,301,158

217,902,182

221,655,021

Source: Capital IQ, a division of Standard & Poor's. *Indicates the number of shares owned.

Institutions would appear to agree. They've been accumulating shares regularly over the past three years. On a quarterly basis, the top 25 Big Money investors took some profits in June but quickly reloaded. An attractive dividend may explain why.

Accelerating growth may also be a factor. After two years of 1% revenue growth, ADP's sales are up 3.5% over the past 12 months. Free cash flow more than tripled over the same period, helping to fund the dividend increases TMFBabo refers to.

Competitor and peer checkup

Company

Institutional Ownership

Insider Ownership

Administaff (NYSE: ASF  )

84.46%

12.55%

Automatic Data Processing

74.99%

0.25%

Intuit (Nasdaq: INTU  )

85.96%

9.02%

Oracle (Nasdaq: ORCL  )

62.56%

22.08%

Paychex

66.62%

10.58%

SAP (NYSE: SAP  )

44.15%

25.47%

Ultimate Software (Nasdaq: ULTI  )

107.24%

3.85%

Source: Capital IQ. Data current as of Nov. 29.

ADP has a weak ownership profile when compared to its primary competitor, Paychex. Institutional ownership is more than 8 percentage points higher, leaving less room for new Big Money buyers. Executive ownership is virtually nonexistent.

By contrast, Paychex insiders own more than 10% of their company's shares outstanding. Founder Tom Golisano owns most of that stake. His 37.7 million shares pay him more than $46.7 million in dividends annually, giving him a strong incentive to maintain and if possible increase payments to shareholders.

That's why, were I forced to bet on just one of these stocks, I'd take Paychex. Do you agree? Disagree? Let us know what you think using the comments box below. You can also recommend other stocks for me to evaluate by sending me an email, or replying to me on Twitter.

Interested in more info on Automatic Data Processing? Add it to your watchlist by clicking here. Add Paychex by clicking here.

BlackRock and Paychex are Motley Fool Inside Value picks. Automatic Data Processing is a Motley Fool Income Investor recommendation. Motley Fool Options has recommended subscribers write a covered straddle position in Paychex. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He owned shares of Oracle at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool owns shares of Oracle and has written puts in Fiserv, in which it also owns shares. The Fool is on Twitter as @TheMotleyFool. Its disclosure policy is smarter than the average bear.


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