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Automatic Data Processing (ADP) Could Be a Great Choice

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Getting big returns from financial portfolios, whether through stocks, bonds, ETFs, other securities, or a combination of all, is an investor's dream. However, when you're an income investor, your primary focus is generating consistent cash flow from each of your liquid investments.

Cash flow can come from bond interest, interest from other types of investments, and of course, dividends. A dividend is that coveted distribution of a company's earnings paid out to shareholders, and investors often view it by its dividend yield, a metric that measures the dividend as a percent of the current stock price. Many academic studies show that dividends account for significant portions of long-term returns, with dividend contributions exceeding one-third of total returns in many cases.

Automatic Data Processing in Focus

Based in Roseland, Automatic Data Processing (ADP - Free Report) is in the Business Services sector, and so far this year, shares have seen a price change of -1.98%. Currently paying a dividend of $1.4 per share, the company has a dividend yield of 2.39%. In comparison, the Outsourcing industry's yield is 0.52%, while the S&P 500's yield is 1.64%.

Looking at dividend growth, the company's current annualized dividend of $5.60 is up 16.9% from last year. In the past five-year period, Automatic Data Processing has increased its dividend 5 times on a year-over-year basis for an average annual increase of 10.65%. Any future dividend growth will depend on both earnings growth and the company's payout ratio; a payout ratio is the proportion of a firm's annual earnings per share that it pays out as a dividend. ADP's current payout ratio is 59%, meaning it paid out 59% of its trailing 12-month EPS as dividend.

Earnings growth looks solid for ADP for this fiscal year. The Zacks Consensus Estimate for 2023 is $9.14 per share, representing a year-over-year earnings growth rate of 11.06%.

Bottom Line

Investors like dividends for a variety of different reasons, from tax advantages and decreasing overall portfolio risk to considerably improving stock investing profits. It's important to keep in mind that not all companies provide a quarterly payout.

For instance, it's a rare occurrence when a tech start-up or big growth business offers their shareholders a dividend. It's more common to see larger companies with more established profits give out dividends. Income investors have to be mindful of the fact that high-yielding stocks tend to struggle during periods of rising interest rates. With that in mind, ADP is a compelling investment opportunity. Not only is it a strong dividend play, but the stock currently sits at a Zacks Rank of 3 (Hold).


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