Some readers may be old enough to remember President Franklin Roosevelt’s New Deal program from the 1930s. Others may relate better to President Lyndon Johnson’s Great Society push in the 1960s, notes Mike Larson, editor of Safe Money Report.
Now, Joe Biden is launching his own mega-plan for America. It’s one that echoes the spirit, mechanics and goals of those earlier federal efforts. But it’s even more aggressive in size, scope and cost — especially if you include the $1.9 trillion stimulus bill from early March.
The huge push will require huge amounts of debt to be sold in the capital markets. It will also require tax-hike legislation to be passed in Congress. Biden’s team is pushing for sizable increases in the corporate tax rate, taxes on foreign income and rates paid by wealthier Americans.
The financial and market implications will be enormous. Our goal is ride the government’s coattails for sizable profits during this extraordinary period of monetary madness. We’ll do that by bearing in mind safe money principles that have never been so important.
One beneficiary of the stimulus splurge and the hiring boost that’s likely to accompany it is Automatic Data Processing (ADP). If you follow economic news, you probably already know who ADP is. That’s because the company releases a monthly employment report ahead of the Labor Department.
It’s able to do so because it processes payroll and delivers other services on behalf of 86,000 clients around the world. Some 22 million (or one in every six) American workers receive wages and salaries via ADP, along with 14 million others in foreign countries.
The company also provides human resource, employee recruitment, benefits management and other services. No surprise, then, that it took a big COVID-19-related hit.
Some clients went out of business. Others let workers go. Demand for add-on services fell. But ADP says those trends improved in late 2020 and that the improvement continued into this year.
That’s why revenue grew slightly to $3.7 billion in the firm’s second quarter and why ADP expects that growth to accelerate in full-year 2021. Earnings per share are also on track to grow as much as 5%.
One other ace in the hole for ADP? It benefits from rising interest rates. That’s because the company temporarily receives and holds funds on behalf of clients before distributing them to satisfy payroll and tax obligations.
The higher rates go, the more interest Automatic Data Processing earns from the high-grade bonds and other securities it invests that money in.
ADP had $25.1 billion in average balances on hand in the second quarter. Because its average yield dropped 50 basis points to 1.7% year over year, interest earnings dropped 23% to $105 million. That decline should reverse in coming quarters as rates climb.
What about income? Well, ADP currently pays out 93 cents per share for a quarterly dividend. That’s good for a market-beating indicated yield of around 2%.
Moreover, the company has raised that payout for 46 consecutive years — an enviable track record given all the economic swings we’ve seen during that time. ADP also consistently buys back its own shares.
Throw in recent upgrades from our Weiss Ratings system, which boosted ADP’s grade to “Buy” territory a few months ago, and there’s a lot to like.
