Automatic Data Processing (ADP) is a global business outsourcing solutions provider that offers software and services for human resources, employee benefits, payroll and tax, explains Sean Brodrick, editor of Wealth Megatrends.
ADP Payroll maintains 940,000 clients and services 16% of the American workforce. The industry has high switching costs due to tedious onboarding and compliance difficulties, allowing ADP to retain 92% of its customers. Bundling other services with payroll such as HR and benefits management further increases ADP’s retention.
A slowdown in interest rates would help employment figures, but ADP benefits even if interest rates stay elevated because the company collects interest on funds held for clients. In Q4, average client funds balances jumped 12% to $32.8 billion. The average yield was 1.5%, but it’s moved higher since then as rates kept jumping.
Interest income isn’t the company's primary earnings driver, but the impacts are felt because the incremental margins are extremely high. Most of the additional interest income moves directly to the company’s net profit.
ADP’s largest risk factors are wage inflation and a potential recession, but inflation is trending lower, and the labor market remains strong. Even with forecasted recessionary impacts, the company’s financial prospects are improving. The firm's earnings are projected to jump 16% YoY in fiscal 2023, 11% in 2024 and 12% in 2025.
The company has a consistent history of eclipsing earnings consensus. It’s beaten EPS estimates in each of the past 21 quarters while averaging 11% earnings growth over the past five years. Wall Street is pricing in recessionary speed bumps, but they shouldn’t materially impact ADP’s bottom line.
The dividend yields 1.9% at current prices, and it’s committed to raising it. The company has increased its dividend annually for 48 consecutive years — and the company is expected to continue raising its dividend 6% per year moving forward.
ADP has shown considerable strength since the beginning of the year. It tracks a 5% year-to-date gain, while the S&P 500 has retreated 17% over the same period. ADP just blasted through overhead resistance. It could consolidate for a brief period, but I expect it to continue soaring to my price target of $367 per share.