ADP: Will Employment Numbers Drive This Investment?
This is episode 15 and today we are going to look at Automatic Data Processing with ticker symbol ADP on the Nasdaq stock exchange. Don’t forget to check out StockMarketIdeasPodcast.com where you can track the price performance of companies discussed in past episodes over time and look at a few of the tools I use to analyze companies including GuruFocus which I use every single day. Alright, let’s get into ADP.
Thank you again for joining me today. Automatic Data Processing Incorporated commonly known as ADP has a long history as a provider of Human Resources management and Payroll Services Company. It was founded back in 1949 doing payroll processing, evolving through the 50s and 60s by using technologies like punch card machines and check printing machines. From there things began to become computerized and what we have today is a global provider of HR services in 140 countries serving hundreds of thousands of businesses and millions of workers receiving a paycheck through their systems.
So ADP has received positive attention from analysts and other financial writers recently. It is widely understood to be a high-quality business and is often categorized as a dividend aristocrat, meaning it has reliably paid a dividend for many years.
One good article recently characterized this company as a defensive choice, while particularly keeping in mind the possibility for a prolonged recession which is hard to anticipate at this point. The specific solutions provided by ADP, particularly through its ADP Workforce Now software are hard to pass on for a business even if unemployment remains higher than expected. So, it almost seems like this company has limited downside, with the likelihood that its overall business doesn’t get diminished in any real way into the long term, as it grows with the overall world economy.
ADP enjoys fairly strong financial strength overall. With around $1.9 billion in cash and equivalents on the balance sheet, and total debt around $2.3 billion, we have a healthy cash to debt ratio around 0.8.
This seems very healthy given a consistent and steady revenue growth rate going back several decades, and strong profit margins holding very steady for many years. Specifically gross profit margins have consistently been in the low 40% range going back at least 15 years. Another great number is the Return on Equity which has always been healthy, but particularly in the past 4 years has been around 45%. This shows that ADP can efficiently create profit from shareholders’ equity. Generally above 15% is a good number, and again ADP is around 45%.
The current dividend yield is at around 2.5% and it's nice to get some cash back. While I don't put much weight on a dividend when it comes to making an investment decision, it is notable and the dividend payout ratio is very healthy meaning it's highly likely this dividend will continue well into the future.
A couple of things to be cautious about when it comes to ADP. Historically it doesn't appear to be overly undervalued especially when looking at something like the PE Ratio which is at around 25 currently. There are also some pretty strong looking competitors that are continuing to grow within the sector including Workday and Paychex and others. While it doesn't seem that there is a low barrier to entry for this industry, technology can change very rapidly and even if ADP doesn't lose market share to competitors, downward pricing pressure could become a problem for them with increased competition. Of course, this is not what we have seen historically with ADP and there is a good chance that the unique products and features it offers will continue to provide great value for customers and shareholders alike.
Overall from what I can see ADP appears to be a great company that is probably at most fairly valued and will continue to do well for many years. With strong profitability and financial indicators, a long history of success, and a global customer base I think ADP has a long and prosperous future as an investment. As always, please do your own research to come to any conclusions, but I hope you have found this helpful. Don’t forget to check out stockmarketideaspodcast.com. Have a wonderful day and we’ll talk soon.