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 Inc (NASDAQ:FB), Ford Motor Company (NYSE:F), or Bank of America Corp (NYSE:BAC). 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 (NASDAQ:ADP), often referred to as ADP. Here are a bunch of interesting things about ADP the company and ADP stock.
1). Here’s a key reason you may want to keep reading — Automatic Data Processing (NASDAQ:ADP) stock’s performance: It’s up about 33% over the past year, and has averaged annual gains of 13.6% over the past 30 years. Great performances are never guaranteed, but this company’s management clearly knows a thing or two about executing well.
2). 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 near $35 billion. (One of its closest competitors is Paychex, Inc. (NASDAQ:PAYX), with a market cap of just $14 billion.) It serves some 600,000 customers in more than 125 nations and rakes in more than $11 billion annually, keeping about 13% of that, more than $1.4 billion, as net profit.
3). Automatic Data Processing (NASDAQ: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, the company regularly issues national employment reports. (In early July, it reported private-sector employment rising by 188,000 jobs in June.)
4). As a business, Automatic Data Processing (NASDAQ: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 Automatic Data Processing (NASDAQ:ADP) to provide services to their HR department…they wanted ADP to be their HR department.”
5). 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. It is one of only four American companies to earn an AAA rating, from both Standard & Poor’s and Moody’s. And it’s the largest human-resources service provider in North America, Europe, Latin America, and the Pacific Rim.
6). ADP stock offers a nice dividend, too, recently yielding 2.4%. Better still, that payout has increased by about 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.
7). 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 20%. On the other hand, gross margin and free cash flow have been declining in recent years (though thanks to a gradual decline in the number of shares, free cash flow per share has been holding up).