In 1949, the payroll company that would become Automatic Data Processing (US:ADP) was founded in a room above an ice-cream shop. It has since evolved into one of the world’s top providers of cloud-based human capital management (HCM) services – covering areas from payroll to human resources (HR), to recruitment and benefits. It has more than 810,000 clients across 140 countries, and delivers payroll for 26m US workers (one in six), as well as 15m international workers.
Strong cash conversion
Share buy backs
Steady revenue and earnings track record
Rising margins
Competition
Vulnerable to changing macroeconomy
HR software might sound like a rather mundane specialism. But in ADP’s case, ‘boring’ translates into solid and defensive growth. Indeed, during the global financial crisis the group achieved revenue growth every year – notwithstanding the fact that it is, ostensibly, reliant on other companies continuing to employ and retain staff.
More recently, over the three years to June 2019 the compound annual revenue growth rate (CAGR) has been a robust 6.7 per cent while a number of factors have contributed to EPS CAGR over the same period coming in at a more impressive 17.3 per cent. Meanwhile, the group continues to generate a high percentage of recurring sales, which underpins the reliability of earnings.
ADP recently announced a 15 per cent uptick in its quarterly dividend to $0.91 (69p), which marks its 45th year of increases, and keeps it firmly on the S&P 500 ‘Dividend Aristocrats’ list. The group has also been buying back shares and last month was authorised to purchase $5bn in common stock, which replaces an earlier 2015 authorisation. Using cash to buy back shares should continue to reduce the number of shares in issue to support EPS growth.
ADP has not just been allowed to plod on quietly over recent years. In August 2017, activist investor Pershing Square announced that it had bought an 8 per cent stake in the group. It had “long admired” it, but had identified an “enormous opportunity” to drive its operating performance by “accelerating growth” and through software enhancements and cost reductions. A public spat between the two parties ensued, with Pershing chief executive Bill Ackman trying – and ultimately failing – to win a seat on ADP’s board.
In any case, ADP subsequently moved forward with a set of “transformation initiatives”, including the accelerated roll-out of ‘next gen’ platforms (spanning HCM, payroll and tax), and the launch of a voluntary early retirement programme to improve its operational efficiency.
The group has also made acquisitions to enhance its position within the changing HCM market, by capitalising on trends such as the gig economy. By way of example, it bought WorkMarket, a provider of cloud-based freelance management services, for $125m in 2018.
First-quarter results for 2020, released in October, revealed that revenues had risen by 6 per cent to $3.5bn, with 4 per cent growth within the larger ‘employer services’ business and 8 per cent growth within ‘PEO services’ (employment administration outsourcing services). While employer services’ new business bookings growth of 6 per cent was below broker JPMorgan’s 8 per cent estimate due to some international deals slipping, the group maintained its full-year guidance. The adjusted operating margin continued its upward trajectory, rising from 20.7 per cent to 21.3 per cent.
Automatic Data Processing, Inc. (NASDAQ:ADP) | |||||
ORD PRICE: | 16,829ȼ | MARKET VALUE: | $73bn | ||
TOUCH: | 16,826-16,831ȼ | 12-MONTH HIGH: | 17,450ȼ | LOW: | 12,140ȼ |
FORWARD DIVIDEND YIELD: | 2.2% | FORWARD PE RATIO: | 25 | ||
NET ASSET VALUE: | 1,248ȼ* | NET CASH: | $2.9bn |
Year to 30 Jun | Turnover ($bn) | Pre-tax profit ($bn)** | Earnings per share (ȼ)** | Dividend per share (ȼ) | |
2017 | 12.4 | 2.45 | 370 | 224 | |
2018 | 13.3 | 2.76 | 453 | 252 | |
2019 | 14.1 | 3.16 | 545 | 286 | |
2020** | 14.9 | 3.49 | 614 | 326 | |
2021** | 16.0 | 3.84 | 681 | 372 | |
% change | +7 | +10 | +11 | +14 | |
Normal market size: | na | ||||
Beta: | 0.57 | ||||
*Includes intangible assets of $3.4bn, or 784ȼ a share | |||||
**JPMorgan forecasts, adjusted PTP and EPS figures | |||||
£ = $ | |||||