Source: ADP
This article was updated on Oct. 28, 2014.
When looking for promising candidates for your stock portfolio, it's easy to just think about the prominent names of the day, such as Facebook, Apple, or Tesla Motors. But there are plenty of other possibilities, many of which have been under our nose for quite some time.
Permit me to introduce you to Automatic Data Processing (ADP +1.75%), often referred to as ADP. Here are a bunch of interesting things about ADP the company and ADP stock.
- A key reason you may want to keep reading is ADP stock's performance: It's up about 18% over the past year, and has averaged annual gains of 15% over the past 30 years. Great performance is never guaranteed, but this company's management clearly knows a thing or two about executing well.
- The basics: The company began in 1949 as Automatic Payrolls, based in New Jersey. It aimed to assist companies with some of their payroll and related processes by applying technology. Today, still based in New Jersey, it's an outsourcing powerhouse, with a market capitalization of $36.7 billion. (One of its closest competitors is Paychex (PAYX +2.07%), with a market cap of just $16.5 billion.) It serves more than 610,000 customers in 100 nations and rakes in more than $12 billion annually, keeping about 12.4% of that, more than $1.5 billion, as net profit.
- ADP is of interest to many more people than just holders (or would-be holders) of ADP stock. That's because, since it serves such a significant chunk of American employers, cutting many millions of paychecks, it has its finger on the pulse of our economy. Thus, ADP regularly issues national employment reports. (In early July, it reported private-sector employment rising by 281,000 jobs in June.)
- As a business, ADP has grown both in size and depth. In its own history, it notes that in the 1990s, "clients that once were content to outsource applications to a service provider looked to outsource entire functions. They no longer wanted ADP to provide services to their HR department...they wanted ADP to be their HR department."
Source: ADP
- Here are some impressive numbers that those interested in ADP stock will enjoy: The company cuts paychecks for one out of six workers in the U.S., or about 24 million people. And you can add 10 million more outside the U.S. Indeed, ADP is the largest human-resources service provider in North America, Europe, Latin America, and the Pacific Rim. For many years. ADP was one of only four American companies to sport an AAA rating, from both Standard & Poor's and Moody's, but it got downgraded to AA early this year on news that it's spinning off its car-dealership services division, which leaves it less diversified operationally.
- ADP stock offers a nice dividend, too, recently yielding 2.6%. Better still, that payout has increased by a hefty 14% annually, on average, over the past decade, and its payout ratio is close to 60%, reflecting an ample margin of safety and plenty of room for further growth. And if that's not enough security, consider that the company has been increasing its dividend annually for nearly 40 years.
- A peek at some of the characteristics of ADP stock via the company's financial statements offers reasons to smile, such as negligible debt and its return on invested capital above 15%. On the other hand, gross margin and free cash flow have declined in the past few years (though free cash flow recently ticked up and a gradual decline in the number of shares has propped up free cash flow per share).
- ADP stock is not without risks, though, such as from Intuit (INTU 0.68%). It already offers businesses helpful software for accounting and taxes, and it's not a huge stretch to see it expanding its offerings to those customers and others. It's also looking to offer apps to businesses, such as ones helping banks with mobile banking. (Of course, ADP has apps, too, with more than two million having been downloaded .) Paychex focuses in general on smaller companies but is also a threat. Even if both companies were to grow slowly, though, they offer rather reliable and therefore attractive income streams via their dividends.
Photo: ADP
- One of the downsides of ADP stock is that it doesn't appear to be bargain-priced right now. Its recent P/E is around 24, and its forward P/E near 23, both considerably ahead of its five-year average of 21. Its five-year average annual growth rates for revenue and earnings are both in the single digits, but they've been picking up the pace in recent years, clocking in near 8% and 9%, respectively, over the past year.
- Factors in favor of a promising future for ADP stock include our recovering economy. More people employed means more business for ADP. It's growing internationally, too, in part organically and in part via acquisition. A rise in interest rates can help, too.
ADP stock is worth considering if you're looking for a solid long-term performer as well as dividend income. You could buy some now -- or perhaps add it your watch list and hope that the price drops some, offering an entry point with greater margin of safety.
