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ADP: Growth-Minded Dividend Aristocrat

adp corporate logo symbol emblem
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Friday, 25 January 2019 01:57 PM Current | Bio | Archive

Growth stocks typically offer investors the potential for a rising share price. These companies typically grow at a high rate, but usually hold high stock valuations.

On the other hand, value stocks have low valuation multiples and frequently pay dividends. But the trade-off to value stocks is that typically, growth has stalled or is in decline.

It is rare to find a company that has a mix of growth and dividends, but Automatic Data Processing (ADP) is a growth-oriented Dividend Aristocrat. ADP has created value for shareholders with annual dividend increases for the past 44 years, as well as high returns from share price appreciation.

ADP is not a cheap stock, but it has earned a high valuation due to its tremendous track record of rewarding shareholders.

Dominant Positioning Fuels Growth

ADP’s impressive history of growth is due to its top industry position. It has amassed 700,000 clients in the payroll and human resource outsourcing industry. ADP has the #1 market position in Professional Employer Organization (PEO) and Human Resource Outsourcing (HRO). It also has the #1 market position in multinational payroll services, and is #1 or #2 in most categories in HCM Solutions.

ADP has a large and diverse clientele of large, medium, and small businesses. Its clients trust ADP to handle their payroll, benefits administration, and many other critical functions. This is how ADP has built its reputation and brand strength over the years.

In the most recent quarter, ADP’s organic revenue increased 7%. ADP expects at least 6% to 7% revenue growth for this year, which means 2019 will be another year of strong growth. Profit margins are expected to expand as well. Overall, ADP expects at least 15% earnings growth for fiscal 2019. This performance will more than justify another strong dividend increase.

Outsourcing Cash To Shareholders

ADP’s growth has allowed the company to raise its dividend for 44 consecutive years. It also raises its dividend at a high rate. ADP has increased its dividend twice in the past year, with a 9.5% declared increase in April and a 14.5% increase announced in November. The stock has a current yield of 2.4%, which is above the S&P 500 average yield.

ADP isn’t the cheapest stock around. Shares trade for a price-to-earnings ratio of 26, based on ADP’s 2019 earnings guidance. This is a fairly high valuation multiple, and ADP has a higher price-to-earnings ratio than the S&P 500. But ADP has earned its above-average valuation. It has historically held a relatively high valuation, and it has not cost shareholders one bit.

For example, in 2016 the stock held a price-to-earnings ratio of 29.0. Since January 1st, 2016, ADP shares have returned 70% including reinvested dividends. This is a very strong rate of return over that period, even with a high valuation multiple at the time.

ADP stock might not appeal to value investors, but the company’s strong growth helps offset a high valuation. ADP has an above-average dividend yield and the company raises its dividend at a high rate.

Ben Reynolds is CEO of Sure Dividend. Sure Dividend helps individual investors build high quality dividend growth stock portfolios for the long run.

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BenReynolds
ADP stock might not appeal to value investors, but the company’s strong growth helps offset a high valuation. ADP has an above-average dividend yield and the company raises its dividend at a high rate.
adp, growth, minded, dividend, aristocrat
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2019-57-25
Friday, 25 January 2019 01:57 PM
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