Automatic Data: Payrolls & Profits

03/22/2016 7:00 am EST

Focus: STOCKS

Ingrid Hendershot

Founder and President, Hendershot Investments, Inc.

Our latest buy recommendation is the market leader in business process outsourcing, handling payroll for one of every six non-government domestic employees, notes Ingrid Hendershot, editor of Hendershot Investments.

In fact, Automatic Data Processing (ADP) generates about five times the payroll processing revenue of its closest competition.

From recruitment to talent management to retirement, the firm has successfully harnessed its scale in payroll to expand worldwide as a leading provider of human resources, benefits and compliance services.

ADP has enjoyed solid growth during the past five years with revenues and EPS compounding at 7.3% and 7.6% annual rates, respectively.

The business is highly profitable with consistent double-digit profit margins. Return on shareholder equity has hovered around 20% for more than a decade, a sign of the company’s durable competitive advantages.

ADP has raised shareholder dividend checks for 41 consecutive years, a remarkable record of steady dividend increases.

The dividend compounded at an average 8% rate during the past five years with the sturdy dividend currently yielding 2.5%.

ADP holds funds for payroll clients, called float, and earns income on that fabulous float. From the conservatively invested float, ADP earned $378 million in fiscal 2015.

Rising interest rates and stable currency markets will provide a tailwind for future ADP profits thanks to higher expected float income.

ADP’s 2016 fiscal year revenues are expected to increase 7% after a 2% foreign currency headwind with EPS expected to increase 11% to 13% thanks to expanding operating margins.

Long-term investors should consider picking up a paycheck from ADP, a high-quality market leader with profitable operations, a steadily growing dividend and expected double-digit EPS growth in fiscal 2016. Buy.

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By Ingrid Hendershot, Editor of Hendershot Investments

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