Dividend Aristocrats in Focus Part 4: Automatic Data Processing (ADP)

While ADP is in the information technology sector, it’s important to note that its business is service relates; not based on technology. Both small and large businesses will continue to need payroll processing and help with ever-increasing regulatory burdens, regardless of how quickly technology advances.

And make no mistake… The amount of regulations that both small and large businesses must keep up with is only increasing – and that’s good news for ADP.

ADP Regulatory Burden

Source: NASDAQ 33rd Investor Program Presentation, slide 15

Growth Prospects & Competitive Advantage

ADP had a very successful company performance last year.

Despite the HCM business being highly competitive, with new and established industry players vying for market share, ADP retained 91.4% of its customers last year, which set a record for the company.

This helped fuel 7% revenue growth last year and adjusted 14% growth in earnings-per-share.


Source:  ADP 4th Quarter 2016 Presentation, slide 4

ADP also managed to grow new business bookings by 13% in 2016, a promising indication of future growth potential. Analysts on average expect ADP will generate $3.50 per share of earnings in the current fiscal year.

This projection would represent 7.7% earnings growth this year. Analyst forecasts are in-line with management’s internal projections. ADP anticipates 7%-9% revenue growth along with 6%-8% earnings growth this fiscal year.

The company is expecting strong growth in fiscal 2017 as well, as the image below shows:


Source:  ADP 4th Quarter 2016 Presentation, slide 6

Looking at the company’s growth in 2016 and expected growth in 2017, a long-term earnings-per-share growth rate of 7% to 9% is certainly reasonable and in line with current trends.

One of the fundamental tailwinds ADP will look forward to is an increasingly complex regulatory environment, both in the U.S. and internationally. Among ADP’s core functions is to help its clients navigate the changing regulatory landscape. This has been a driving force behind ADP’s impressive growth in recent years.

Over the past five years, ADP has increased revenue and earnings per share by 31% and 34%, respectively. This is solid growth for an established blue chip dividend payer like ADP.

ADP’s solid growth is also the result of its competitive advantage, which is itsscale and excellent reputation among its customers. As a global company, ADP has the resources to work with companies that have employees across multiple nations. This is an ability that smaller companies do not possess.  ADP is the largest publicly traded HCM business in the world.  You want a trusted and established business to handle your benefits, health care, and payroll.  The company’s reputation and brand add to its competitive advantage.