ADP Stock Analysis & Review Of The ADP Dividend

ADP Dividend History, Growth Rate, Safety, Stock Value, & More!

Today we have an ADP stock analysis on tap, and let’s also check on the ADP dividend.

Quality stocks rarely come at a cheap price. And for me, this payroll and human resources services company, ADP, falls into the high-quality dividend stock category.

And by completing an ADP dividend stock analysis.  We will get a refresher on the ADP dividend metrics, business fundamentals, ADP stock valuation, and much more!

Because these are all important aspects of selecting the best dividend stocks. But first, I’d like to start with some key points.

adp stock analysis

Disclosure: At no cost to you, I may get commissions for purchases made through links in this post.

Key Takeaways: ADP Stock Analysis & Dividend Review

1. The last global recession and contraction in employment temporarily stalled ADP’s revenue and profit growth.

2. But growth has resumed. And I think mid to high single-digit percentage annual profit growth over the long term appears attainable.

3. ADP has been increasing our dividend payments every year since 1975. Making the company a Dividend Aristocrat.

4. The dividend yield is a little low for my liking. But the dividend growth rate has been strong. And dividend safety is very high.

5. As usual, ADP stock appears pricey. But, I believe ADP is one of those good dividend stocks for long-term buy and hold dividend stock investors. Especially on any stock price weakness.

With those highlights covered. Let’s dig into the details.

Because knowing your investments is smart money management. And I use Personal Capital to manage my entire financial picture FREE of charge.

You can too. So, be sure to check out Personal Capital.

Now, let’s move forward with ADP…

ADP Company Background

Within the human resources and payroll functions, ADP offers a robust range of services and solutions.  Some of them include:

  • Payroll processing
  • Time & attendance record keeping
  • Talent management
  • Employee benefits administration
  • Consulting, outsourcing & technology integration

These services are provided to businesses of different sizes operating in a wide range of industries.

ADP operates in the same sector as Paychex.  Paychex is another super high-quality company with outstanding dividend growth.

ADP Stock Symbol

First of all, ADP is an acronym for the company’s full name: Automatic Data Processing.

Furthermore, the company’s stock also trades using these letters.

Finally, it trades on the NASDAQ stock exchange. (NASDAQ: ADP).

ADP Strategy To Support Future Dividend Growth

ADP dividend review

ADP anticipates long-term revenue growth in the markets they participate in. And their growth will come from the following areas:

  • Cloud-based human capital management solutions
  • Human resources outsourcing
  • International expansion

ADP will combine its revenue growth initiatives with cost efficiencies. Expense reductions will come from:

This combination of factors should deliver sustainable annual earnings growth moving forward.

But what about ADP’s dividend? That topic is next…

Does ADP Stock Pay A Dividend?

Yes. ADP pays a dividend. And has paid a dividend for many years.

The company’s dividend history, dividend growth rate, and dividend safety have impressed me for a long time. Let’s see why.

ADP Dividend Rate Per Share

Like every good dividend stock, ADP has an annual forward dividend rate per share.

The annual forward dividend is the most recent quarterly dividend approved by ADP’s board of directors. Multiplied by the number of times a year the company pays its dividend.

Dividing the forward dividend by the stock price gives us the dividend yield…

ADP Dividend Yield

In my opinion, ADP typically carries a low dividend yield. It is below my preferred range of 3-5% for making new investments.

Furthermore, dividend yields can change quickly. And move in the opposite direction of the stock price. So, falling stock prices are usually a good thing for dividend stock investors.

A lower stock price gives us a higher dividend yield. And a lower purchase price for the stock.

So, lower stock prices are typically a “win-win” situation That is assuming the company’s dividend is safe. Also, the dividend will continue to grow.

How Often Does ADP Pay Dividends?

ADP pays dividends every 3 months or 4 times per year. Each quarterly dividend payment is one-fourth of the annual forward dividend rate.

This is a typical dividend payment pattern. At least for U.S.-based dividend stocks.

On the other hand, many companies located outside the U.S. do not follow this pattern.

They pay dividends less frequently during the year. Sometimes just once. Or, at most, two times per year.

When Are ADP’s Dividends Paid?

ADP is a quarterly dividend stock

The company’s dividends are paid during January, April, July, and October.

During these months, the dividend is paid on the first day.

It doesn’t matter if the first day of the month falls on a weekend or holiday. You can count on getting your dividends on the first!

ADP’s Ex-Dividend Date

As an investor in ADP stock, you must complete your purchase before the ex-dividend date. That is if you want to receive the next stock dividend payout.

No matter if the dividend is for January, April, July, or October.

ADP’s ex-dividend date falls in the month PRIOR to when its quarterly dividend is paid. Those months are December, March, June, and September.

During these months ADP stock goes ex-dividend on about the 10th day. Give or take a day or two in either direction.

Since ADP’s ex-dividend date is slightly different each quarter. It is best to check the ADP investor relations website for the most recent information.

On the other hand, are you a long-term buy-and-hold dividend stock investor like me? If that’s the case, you don’t need to worry.

You will get every dividend the company approves based on the shares of ADP stock that you own. In this regard, dividends are truly a great form of passive income.

Invest money. Do nothing more. Get paid dividends. “Rinse and repeat” as the saying goes.

Now for a little history lesson on ADP’s dividend…

ADP Dividend History

ADP started paying a recurring cash dividend in 1974.

Then for the first time increased the dividend in 1975. And, the company has continued to increase its dividend annually every year since.

ADP Is A Dividend Aristocrat

This number of annual dividend increases makes ADP a Dividend Aristocrat company.

Dividend Aristocrats are companies that have increased their dividends for at least 25 years in a row.

They represent stocks held by many good dividend-paying ETFs. Providing underlying support to the stock price.

Will ADP Become A Dividend King?

Assuming ADP is able to continue increasing its dividend annually, the company will become a newly crowned Dividend King.

Dividend Kings are incredible and rare companies. They have increased their dividends for at least 50 consecutive years!

They are great stocks to hold. If making money off dividends is the goal.

So we know that ADP has an excellent long-term track record of paying increasing dividends. But what about dividend growth?

Let’s check on that next…

ADP Dividend Growth Rate

There are some great aspects regarding ADP dividend growth.

First of all, I have observed an excellent run of dividend increases over the past several years.

Furthermore, there has been an acceleration of dividend growth at times.

Finally, there is nothing like good dividend growth stocks to boost an investor’s passive income from dividends!

And from my perspective, ADP has an awesome track record. Reflected in a long history of dividend increases. And a more recent history of strong dividend growth.

But, the news about dividends isn’t always good. Here’s why…

ADP Dividend Increases During Recessions

ADP’s business performance is closely tied to economic conditions.

For example, the brief recession and decrease in employment caused by the global health crisis took a toll on ADP’s performance.

Their revenue growth slowed dramatically. Since it is leveraged to employment levels in the global economy. Also, the company’s outlook for the future became less clear.

So, they “pulled on the reigns”. And slowed the growth in quarterly dividend payments at that time.

So, just a word of warning. A weak economy and higher unemployment can reduce ADP’s dividend growth from time to time.

ADP Dividend Policy

I like it when a company clearly communicates its objectives for dividend payments. Many companies choose not to do this, but ADP has delivered for us in this area.

According to a past investor presentation, ADP is targeting a 55% – 60% dividend payout ratio.

The comment tells me, as ADP grows its earnings. Our dividend payments will grow too.

This is a great example of a company communicating its dividend policy. On the other hand, paying dividends is not required. And a company’s dividend policy can change at any time.

More on the dividend payout ratio in a moment. But first, let’s discuss business fundamentals provided by the company’s public financial reporting.

We will start with revenue. Because growing dividends come from growing earnings and growing earnings partially come from growing revenues.

ADP Revenues

Over the long term, revenue growth has been steady.

It is generated from 3 main segments:

  • Professional employer organization
  • Employer services
  • Interest from holding client funds

First of all, revenue has accelerated due to ADP’s Professional Employer Organization (PEO) segment.  This segment provides comprehensive HR solutions for small and mid-size businesses.

Furthermore, revenue comes from its more traditional employer services segment. This segment includes payroll processing.

Employer services represent the largest segment but it grows slowly.  This segment increases revenues mainly by adding new clients to its customer list.

Finally, ADP also makes revenue from interest earned on payroll funds deposited by their clients. This is due to the period of time between when a client deposits its money for payroll with ADP. Versus when employees actually receive the money.

Interest earned on client funds is tied to interest rates. Thus, higher rates mean more revenue. And vice versa.

But. regardless of the level of interest rates. Earnings on client funds are a small piece of the total revenue pool.

Next up, earnings, cash flow, and ADP’s dividend payout ratios.

ADP Dividend Payout Ratio Based On Earnings

Recent earnings growth has been strong.

Since ADP profits have benefited from growth in the US economy and full employment in recent years.

The company’s dividend has increased right along with earnings. And ADP’s dividend payout ratio has been running in its target range. Consistent with ADP’s dividend policy statement mentioned previously.

A lower dividend payout ratio is generally better.  It shows the company has ample room to raise the dividend in the coming years.  Or, withstand an earnings drop without having to reduce their dividend.

Next, let’s talk about cash flows…

ADP Dividend Payout Ratio Based On Free Cash Flow

Since our regular dividend income stream. Comes from cash. Not directly from accounting earnings.

It is a good practice to look at a company’s use of cash.

First of all, as a service business, ADP’s capital investment needs are minimal. When compared to other dividend-paying companies, like a utility stock.

Furthermore, the dividend payout ratio as a percentage of free cash flow? It typically runs even lower than as a percentage of accounting earnings.

How ADP Allocates Its Cash

Thus, dividend payments consume only a fraction of free cash flow. This is a great sign for dividend safety.

Furthermore, ADP’s priorities for cash include:

  1. Invest in the business for organic revenue growth and margin expansion
  2. Invest in acquisitions to supplement existing capabilities and strategy
  3. Return cash for shareholders regularly through dividends and share repurchases

Finally, by looking through ADP’s financial statements, item 3 (dividends and share repurchases) typically consume most of the available cash. And, as a dividend stock investor, that is fine by me.

Next up, is ADP’s financial position. I will look at credit ratings and debt to make an assessment. Then, I can conclude on dividend safety and dividend growth.

ADP Credit Rating

First of all, knowing a company’s credit rating is important.  Furthermore, a corporation’s credit rating is similar to how your personal credit score works.

You can check yours for free with Credit Karma: just click the link. While you do that, I will check ADPs.

Since higher credit ratings mean lower risk to those who lend the company money.  Also, higher credit ratings mean lenders are more likely to get their loans paid back.

ADP has an excellent credit rating.  The company is rated investment-grade by S&P and Moody’s, respectively.

Furthermore, the company’s credit ratings are some of the best you can find. Only 2 US companies have the highest, AAA credit rating.

You can read my reviews about them by following the links below:

ADP Is High Up On The Credit Evaluation Grid

Credit rating evaluation chart

ADP also had the highest AAA credit rating as recently as 2014. But, was downgraded after they spun off the dealer services business known as CDK Global.

CDK Global provides software and technology solutions for automotive retailers.  It didn’t fit with ADP’s business plans. So, its stock trades and business operates as a separate company now.

ADP Debt To Equity

With such an outstanding credit rating, it comes as no surprise to me that ADP’s financial position is very strong. I judge a company’s financial position based on its capital structure.

Specifically, I do not like to see a company with large amounts of debt on the balance sheet. Debt repayment can be a threat to dividend safety if a business experiences financial difficulties.

Management maintains ADP’s debt to equity ratio at a very reasonable level. And, the company typically has a sizeable cash position on its balance sheet.

So, in my opinion, ADP has a rock-solid balance sheet.

ADP Dividend Safety

ADP’s dividend gets very high marks for safety. In my opinion, there is little to no chance of the ADP dividend being reduced anytime in the foreseeable future.

I base my evaluation of dividend safety on ADP’s:

  • Excellent business fundamentals
  • Reasonable dividend payout ratios
  • Lowish dividend yield
  • Consistently strong cash flows
  • High credit ratings
  • A strong balance sheet with reasonable debt load

So, ADP’s dividend is very safe. But will it grow? Let’s see…

ADP Dividend Growth Projection

For dividend income planning purposes, I make a dividend growth projection for each of my holdings. I base this projection on

  • Historical dividend growth
  • Dividend payout ratios
  • Stated dividend policy when management provides one
  • Business fundamentals
  • Business growth strategy
  • Profit outlook

The global recession put a lid on earnings and dividend growth. At least for the short term.

But, over the long term, I am forecasting ADP dividend growth to be 7-9% annually. If ADP is able to deliver higher dividend growth like in years past, I will be very happy.

Here’s my logic on this dividend growth rate…

First of all, the markets ADP operates in are forecasted to grow 5-6%. So I will assume ADP will grow with the market.

And increase their annual revenue by a like amount. If prices remain constant that revenue growth rate will flow right to profit growth.

Furthermore, I expect the company to operate more efficiently. So scale and cost efficiencies will add another 2-3% to earnings growth.

Finally, I will assume ADP’s dividend payout ratio will remain relatively constant. This will be consistent with its dividend policy statement.

So, 5-6% profit growth from revenues. Plus 2-3% from cost efficiencies. And a constant dividend payout ratio. All of this gives me a 7-9% long-term annual ADP dividend growth rate forecast.

Next up. A good stock analysis would not be complete without checking on the stock’s valuation. So, let’s do that now.

ADP Stock Valuation

I will use two different valuation measures. In order to get a gauge on ADP’s stock price.

Note that these guides on ADP’s stock valuation are at the time of this article update.

Knowing valuation metrics can change quickly. You might like the Simply Investing Report & Analysis Platform.

For all of the latest dividend metrics. And a current call on stock valuation using Simply Investing’s rigorous standards.

More on Simply Investing below. For now, the dividend discount model…

ADP Dividend Discount Model

The single-stage dividend discount model takes into account several factors I have discussed thus far.

  • Current annual dividend payment
  • Projected annual dividend growth
  • My desired annual rate of return

Using these assumptions, the constant growth model suggests the stock is trading near its fair value.

Simply Investing Report

Now, back to Simply Investing for its call on valuation.

And be sure to read my full review about Simply Investing. There you can learn more about how the service values a dividend stock. And how it delivers to subscribers the best dividend stocks to buy and when to buy them.

But for now, Simply Investing suggests ADP stock is overvalued.

Source: Simply Investing

So, the big question…

Is ADP A Good Stock To Buy Now?

To summarize what we have learned from the ADP stock valuation discussion.

The dividend discount model suggests the stock is fully valued. And Simply Investing judges ADP stock to be overpriced.

Here are my thoughts about investing in ADP…

Having followed ADP stock for many years, it usually looks pricey. If I waited for a better price to invest. I may have never done so.

So, taking into account all of these factors and my history with the stock. I think it is a buy for my portfolio on any pullbacks in price. Perhaps your portfolio too?

Also, ADP stock is a good candidate for dollar-cost averaging. In other words, making small incremental purchases to build the position in your portfolio over time.

And if you are ready to invest. Make sure you trade stocks for free. I use the Webull app.

For a limited time, Webull is offering new investors free stock. Check Webull out here.

ADP Stock Analysis & Dividend Review: Wrap Up

I have been very fortunate to own ADP for a long time.  It holds a mid-size position in my dividend stock portfolio.

I built my position from 2010 through 2012. Making multiple smaller incremental purchases. Just like I recommended above.

First of all, the company’s business fundamentals are very solid.

And the company’s historical dividend growth has been excellent.

Furthermore, future dividend growth should also be strong.

Finally, the dividend appears to be very safe from any potential reduction.

In my opinion, ADP is a great dividend growth stock to buy and hold for the long term.

I would love to buy more on any price weakness. Even without a drop in the share price, I may make another small purchase or two.

As I said at the beginning, high-quality dividend stocks rarely come at a cheap price. And ADP is no different.

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Author Bio, Disclosure, & Disclaimer: Please join me (Tom) as I try to achieve my goals, find my next place to live, and make the most of my money. But understand, I am not a licensed investment adviser, financial adviser, real estate agent, or tax professional. I’m a 50-something-year-old guy, CPA, retired finance professional, and part-time business school teacher with 40+ years of DIY investing experience. I’m just here because I enjoy sharing my findings and research on important topics. However, nothing published on this site should be considered individual investment advice, financial guidance, or tax counsel. Because this website’s only purpose is general information & entertainment. As a result, neither I nor Dividends Diversify can be held liable for any losses suffered by any party because of the information published on this blog. Finally, all written content is the property of Dividends Diversify LLC. Unauthorized publication elsewhere is strictly prohibited.

I Own ADP Stock & Collect The ADP Dividend