Linked here is a detailed quantitative analysis of Automatic Data Processing Inc. (ADP). Below are some highlights from the above linked analysis:Company Description: Automatic Data Processing Inc., one of the world’s largest independent computing services companies, provides a broad range of data processing services.Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham NumberADP is trading at a discount to only 3.) above. Since ADP’s tangible book value is not meaningful, a Graham number can not be calculated. When also considering the NPV MMA Differential, the stock is trading at a slight discount to its calculated fair value of $250.9. ADP earned a Star in this section since it is trading at a fair value.Dividend Analytical Data: In this section, there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%ADP earned two Stars in this section for 2.) and 3.) above. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45% ADP earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1974 and has increased its dividend payments for 48 consecutive years.Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:1. NPV MMA Diff.
2. Years to > MMAADP earned a Star in this section for its NPV MMA Diff. of $637 This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as ADP has. If ADP grows its dividend at 10.5% per year, it will take 7 years to equal a MMA yielding an estimated 20-year average rate of 3.75%.Peers: The company’s peer group includes: Paychex, Inc. (PAYX) with a 3.3% yield, and Insperity, Inc. (NSP) with a 2.5% yield.Conclusion: ADP earned one Star in the Fair Value section, earned two Stars in the Dividend Analytical Data section, and earned one Star in the Dividend Income vs. MMA section for a total of four Stars. This quantitatively ranks ADP as a 4-Star Strong stock.Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $266.25 before ADP’s NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 48 years of consecutive dividend increases. At that price, the stock would yield 2.1%.Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 9.9%. This dividend growth rate is below the 10.5% used in this analysis, thus providing a margin of safety. ADP has a risk rating of 1.25 which classifies it as a Low risk stock.As the industry leader ADP enjoys advantages of scale, a respected brand and protected by high customer switching costs. Financially, the company has a good balance sheet, with a debt to total capital of 42% (down from 47%), which is below my desired maximum of 45%, and a recurring revenue stream generating steady cash flows. Its free cash flow payout of 63% (up from 54%) is above my maximum of 60%. The stock is trading below its calculated fair value of $250.90.More By This Author:Walgreens Boots Alliance, Inc. Dividend Stock Analysis
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