ADP: A Low-Key Winner With AAA Credit

Apple‘s (NASDAQ:AAPL) smash-hit bond offering saw Moody’s AA credit go out the door for AAA-rated prices, and to much excitement.

Dependable Dividend StocksBut there’s a hidden dividend gem with some actual AAA credit that deserves some recognition of its own.

That stock is ADP (NASDAQ:ADP), one of only four companies in the U.S. — alongside Exxon Mobil (NYSE:XOM), Microsoft (NASDAQ:MSFT) and Johnson & Johnson (NYSE:JNJ) — that carry a perfect AAA rating.

And it’s a Dependable Dividend Stock, to boot.

You probably know about ADP through some of its most obvious and public activities: The company processes payrolls (1 in 6 U.S. workers cashes an ADP check), offers corporate benefits services and provides the public with monthly reports and data on hiring, unemployment claims and jobs growth.

However, ADP also focuses on the outsourcing of the entire spectrum of business services, including insurance and retirement services, human resources management, benefits administration and time and attendance management. And, ADP offers a complete lineup of tax, accounting and compliance services, up to and including employment verification and unemployment claims management.

Lastly, ADP’s Practice Management group provides services that include billing and coding software, rules compliance and reporting, and medical practice management.

Indeed, ADP is a diversified operation in an industry (payroll processing and HR services) where the price for changing to another service provider — say, Paychex (NASDAQ:PAYX) — is costly and just a plain ol’ pain in the backside.

That’s a nice moat to play around.

Those diverse and stable revenue streams — along with a sturdy financial performance, pristine balance sheet and steady cash flow — all helped ADP garner that AAA rating.

Coming out of the financial crisis, ADP has been a model of consistent revenue growth, and it has posted solid earnings improvement to match:

2010 2011 2012
Revenue (millions) $8.93 $9.88 $10.70
Net Income (per share) $1.21 $1.25 $1.39

ADP is on track for another steady year in 2013, too. Fiscal third-quarter revenues increased 7.1% year-over-year to $3.11 billion, while earnings improved 6.7% to 91 cents per share, with both results in line with analyst expectations. Meanwhile, the company also raised the low end of its outlook for the full year from 5% growth to 6% on the top and bottom lines.

Meanwhile, ADP has no long-term debt in its capital structure, resulting in a laughable (but laudable) 0.25 debt-to-equity ratio.

All of which leads to what drives ADP’s string of 38 consecutive annual dividend increases: cash flow. Cash from operations has averaged just more than $1.7 billion over the past five years, and with nearly $1.5 billion in cash on hand over that same period, ADP has no problems meeting its payments.

Granted, ADP’s dividend payout ratio of 57% isn’t sparse, but there’s still enough room to continue maintaining its five-year dividend growth rate of 12%. ADP’s most recent increase was just under that clip — 10% to 44 cents quarterly — resulting in a current annualized yield of roughly 2.5%.

The one thing to worry about with ADP (and this is a common theme across Wall Street right now) is its all-time high prices right now. ADP is among numerous dividend stocks that have been pushed higher in the chase for defense, and its forward P/E of 22 suggests caution.

However, while you wait for a better price, I can’t stress this enough — ADP has AAA credit, and therein lie expectations that you’ll never see much of an earnings or revenue surprise to really knock the stock off its stool.

ADP has earned its stripes. It might be one of a handful of overbought dividend stocks still worth stretching for.

Marc Bastow is an Assistant Editor at As of this writing he is long AAPL, JNJ, XOM and MSFT.

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