Automatic Data Processing: Dividend Stock Analysis

Automatic Data Processing, Inc. (ADP) provides technology-based outsourcing solutions to employers, and vehicle retailers and manufacturers. It operates in three segments: Employer Services, Professional Employer Organization Services, and Dealer Services. This Dividend Aristocrat has raised dividends for 35 consecutive years. Back in November 2009 Automatic Data Processing announced a 3% dividend increase.Over the past decade this dividend stock has delivered an average total return of 1.20% annually. In 2007 ADP spun off its Brokerage Services business, distributing one share of Broadridge Financial (BR) common stock for every four shares of ADP common stock held by shareholders. The total returns calculation for ADP over the past decade includes this transaction.The company has managed to deliver an 8.10% average annual increase in its EPS between 2000 and 2009. Analysts expect Automatic Data Processing to earn $2.40 share in FY 2010, followed by an increase to $2.55/share in FY 2011. While the employment picture is bleak in the US, it is improving. In addition to that, the market for payroll outsourcing for small and medium sized businesses could provide opportunities for growth, because of low penetration from outsourcers. The market for processing services that ADP specializes in is expected to grow at a pace of 5% per annum until 2013. The company's venture in the business process outsourcing is a bold move, considering the intense competition in this market segment, which could add pressure to margins. The market for business process outsourcing is expected to grow by almost 7% per year by 2013. Overall there is a high barrier to entry in the payroll processing field, since a sizeable investment in infrastructure is needed to process millions of employees' information. The big plus of this business is the recurring revenue stream and strong cash flow. ADP is a great proxy for exposure to the technology sector, since it has a proven business model, and it is less susceptible to technological obsolescence. As prices for technology products decrease, ADP can do its job cheaper, which helps profitability.... Read more

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