Recs

7

Will Automatic Data Processing Help You Retire Rich?

Now more than ever, a comfortable retirement depends on secure, stable investments. Unfortunately, the right stocks for retirement won't just fall into your lap. In this series, I look at 10 measures to show what makes a great retirement-oriented stock.

For most people, there's nothing more important than getting their paycheck. Even if workers aren't always aware of it, many employers rely on Automatic Data Processing (Nasdaq: ADP  ) to handle the nuts and bolts of their employee accounting, including cutting paychecks and making direct-deposit transfers with the right amounts withheld and sent to the proper places. The recession hurt ADP's business as unemployment rose, but lately workers seem to be getting jobs again. Will ADP see the benefit of a recovery? Below, we'll revisit how Automatic Data Processing does on our 10-point scale.

The right stocks for retirees
With decades to go before you need to tap your investments, you can take greater risks, weighing the chance of big losses against the potential for mind-blowing returns. But as retirement approaches, you no longer have the luxury of waiting out a downturn.

Sure, you still want good returns, but you also need to manage your risk and protect yourself against bear markets, which can maul your finances at the worst possible time. The right stocks combine both of these elements in a single investment.

When scrutinizing a stock, retirees should look for:

  • Size. Most retirees would rather not take a flyer on unproven businesses. Bigger companies may lack their smaller counterparts' growth potential, but they do offer greater security.
  • Consistency. While many investors look for fast-growing companies, conservative investors want to see steady, consistent gains in revenue, free cash flow, and other key metrics. Slow growth won't make headlines, but it will help prevent the kind of ugly surprises that suddenly torpedo a stock's share price.
  • Stock stability. Conservative retirement investors prefer investments that move less dramatically than typical stocks, and they particularly want to avoid big losses. These investments will give up some gains during bull markets, but they won't fall as far or as fast during bear markets. Beta measures volatility, but we also want a track record of solid performance as well.
  • Valuation. No one can afford to pay too much for a stock, even if its prospects are good. Using normalized earnings multiples helps smooth out one-time effects, giving you a longer-term context.
  • Dividends. Most of all, retirees look for stocks that can provide income through dividends. Retirees want healthy payouts now and consistent dividend growth over time -- as long as it doesn't jeopardize the company's financial health.

With those factors in mind, let's take a closer look at Automatic Data Processing.

Factor

What We Want to See

Actual

Pass or Fail?

Size Market cap > $10 billion $26.8 billion Pass
Consistency Revenue growth > 0% in at least four of five past years 4 years Pass
  Free cash flow growth > 0% in at least four of past five years 4 years Pass
Stock stability Beta < 0.9 0.67 Pass
  Worst loss in past five years no greater than 20% (9.1%) Pass
Valuation Normalized P/E < 18 22.13 Fail
Dividends Current yield > 2% 2.9% Pass
  5-year dividend growth > 10% 13.4% Pass
  Streak of dividend increases >= 10 years 37 years Pass
  Payout ratio < 75% 52.9% Pass
       
  Total score   9 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Automatic Data Processing last year, the company has indeed made a huge recovery, picking up two extra points. Solid revenue and free cash flow growth helped bring the company to the brink of a perfect score, although its valuation remains a bit too high to grab that elusive 10th point.

ADP shares the payroll and HR services industry with rival Paychex (Nasdaq: PAYX  ) . ADP tends to focus on large corporations, while Paychex gravitates toward small businesses. So far, there's been room enough for both companies, as each has seen solid growth -- although ADP's growth has been faster.

But additional competition is starting to ramp up. Intuit (Nasdaq: INTU  ) has traditionally provided tax and accounting software, but payroll is a natural expansion of its business. With its popular QuickBooks software, Intuit is more of a threat to Paychex than ADP at the moment, but Intuit certainly has the scale to appeal to larger employers in time. Also, Insperity (NYSE: NSP  ) has had success focusing more on HR services, which carry higher margins in low-interest-rate environments like we've seen for several years.

For retirees and other conservative investors, ADP can't match Paychex on dividend yield, but its track record of significant boosts to its payout has no equal in the industry. With the only blemish on its record being a somewhat expensive share price, ADP deserves a close look for a spot in your retirement portfolio.

Keep searching
Finding exactly the right stock to retire with is a tough task, but it's not impossible. Searching for the best candidates will help improve your investing skills, and teach you how to separate the right stocks from the risky ones.

If you really want to retire rich, no one stock will get the job done. Instead, you need to know how to prepare for your golden years. The Motley Fool's latest special report will give you all the details you need to get a smart investing plan going, plus it reveals three smart stocks for a rich retirement. But don't waste another minute -- click here and read it today.

Add Automatic Data Processing to My Watchlist, which will aggregate our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. Motley Fool newsletter services have recommended buying shares of Automatic Data Processing and Paychex, as well as writing a covered straddle position in Paychex. 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 Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 19, 2012, at 10:25 AM, yhtbaotbai wrote:

    First: Last I heard, ADP was one of only four U. S. companies whose debt is (still) Aaa-rated. Wow!

    Next: I did hear a talking-head on TV attribute

    an Aaa-quality rating to a company which has NOT

    been Aaa-rated for many years now. Hmmm!

    Thirdly: What do you mean by "help you retire rich"?? Albert Einstein is attributed with having said, "When I get new information, I change my mind. What do you do?" I say this because over time, their situation might be the same or it might be better or it might be worse. Investors need to keep their eyes open! Joan in Houston

  • Report this Comment On April 19, 2012, at 10:33 AM, mwlove wrote:

    I don't expect ADP to help me get rich, but it has made me more affluent, and I'm happy to be a stockholder. It has been an island of stability and steady returns in a sea of volatility. Good growth and a very good dividend. I expect more of the same as job growth picks up.

  • Report this Comment On April 20, 2012, at 9:39 AM, DJDynamicNC wrote:

    ADP is one of the pillars of my portfolio regardless. I like the stability and the dividend. I recognize that the valuation is high, but the same lengthy time horizon that makes me willing to accept some riskier positions also makes me willing to accept higher valuations on stable dividend bearers like this one. I can expect to collect dividends for quite some time on it.

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Dan Caplinger
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Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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