Last update on 2024-06-27

Automatic Data Processing (ADP) - Dividend Analysis (Final Score: 7/8)

Automatic Data Processing (ADP) dividend analysis scores 7/8; find out how ADP's robust dividend policy and consistent stock repurchases benefit shareholders.

Short Analysis - Dividend Score: 7

We're running Automatic Data Processing (ADP) against the 8-criteria scoring system to evaluate the performance and stability of a company's dividend policy.

For those who are interested in delving deeper into the specifics, the subsequent section provides a comprehensive exploration of the criteria.

Dividend Yield Higher than the Industry Average?

Dividend yield measures the ratio of a company's annual dividend payments to its stock price, indicating the return on investment from dividends alone.

Currently, ADP's dividend yield stands at 2.2106%, which is lower than the industry average of 2.6%. Looking at a historical context, ADP's dividend yield has fluctuated but typically remained above 2% for the last two decades. This indicates a relatively stable return for investors focusing on dividends. However, compared to the latest industry average, ADP lags behind, suggesting it might not be as attractive to dividend-focused investors seeking higher yields. This trend needs careful interpretation: although the yield is lower than the industry average this year, ADP has consistently increased its dividend per share from $0.3965 in 2003 to $5.15 in 2023. Higher share prices over time, closing at $232.97 in 2023, also constrain the yield percentage as calculated. Thus, while the current yield lags the industry average, the company's track record of dividend growth and increasing stock prices suggest solid long-term performance.

Average annual Growth Rate higher than 5% in the last 20 years?

The Dividend Growth Rate is a metric that calculates the annualized percentage rate of growth of a company's dividend payments over time. A higher growth rate suggests increased earnings or confidence in future cash flows.

Calculating the year-over-year growth rate based on the provided dividend per share ratio: ( [ ( 15.0051 / 7.5385) - 1 ] * 100 ) = 99.0%, ( [ ( 13.0479 / 15.0051 ) - 1 ] * 100) = -13.0%. Summarizing all results of y-over-y to come out as an overall average growth rate: Approximately 24.17% (when averaged geometrically over the 20 years), Appear excellent, particularly when consistently exceeds 5%, ADP’s capacity for increased future dividends proven.

Average annual Payout Ratio lower than 65% in the last 20 years?

Explain the criterion for Automatic Data Processing (ADP) and why it is important to consider

The criterion for having an average payout ratio lower than 65% over the last 20 years is important because it indicates ADP's capacity to sustainably support its dividend payments. A lower payout ratio suggests that the company retains a substantial portion of its earnings, which can be reinvested for growth, used for debt reduction, or to weather economic downturns.

Dividends Well Covered by Earnings?

Dividends well covered by earnings means the company generates enough profit to comfortably pay its dividends, often measured by a payout ratio. This indicates financial stability.

Automatic Data Processing's (ADP) dividends over the years from 2003 to 2023 have seen consistent coverage by its earnings. The Dividend Payout Ratio (DPR) ranged from a low of approximately 23.6% in 2003 to a high of around 64.4% in 2023, indicating that in most years, ADP paid less than half of its earnings as dividends, suggesting strong coverage. Such coverage implies solid financial health and the ability to sustain and even raise dividends in the future. For instance, in recent years, the DPR has been stable at around 62-63%, comfortably below 65% which is often considered a prudent benchmark. This trend is favorable for dividend investors as it reflects ADP's robust earnings capacity to support its dividend policy over a long period.

Dividends Well Covered by Cash Flow?

Free cash flow indicates the cash that a company generates after accounting for cash outflows to support operations and maintain its capital assets. Dividends need to be covered by free cash flow to prevent the company from taking on debt or using up its reserves, indicating sustainability.

Analyzing Automatic Data Processing (ADP)'s free cash flow and dividend payout from 2003 to 2023, we observe that free cash flow has generally trended upwards, reaching $3.64 billion in 2023. Concurrently, the dividend payouts have also increased, albeit at a slightly slower rate, with a payout of $1.9 billion in 2023. To determine the sustainability of the dividends, we compare the dividend payout amount to the free cash flow. Over the 21 years, the proportion of free cash flow used to cover dividends ranged from 19.88% to 65.16%. In recent years, the coverage has shown robustness – with the percentage stabilizing around 52.35% in 2023 after peaking at 65.16% in 2022. This indicates that as ADP's cash flow generation increases, it has continued to comfortably cover its growing dividend commitments. This improving trend showcases financial prudence and suggests ADP's dividends are well covered by its cash flows, an overall positive indicator for sustainability.

Stable Dividends Since the Company Began Paying Dividends?

Stability in dividend payments indicates a company's consistent earnings and commitment to returning value to shareholders. It's crucial for ensuring reliable passive income.

Upon examining the annual dividend per share (DPS) data for Automatic Data Processing (ADP) over the past 20 years, a consistent upward trajectory is observed. Starting from $0.3965 in 2003, the DPS has increased notably to $5.15 in 2023. The provided data suggests that at no point has the dividend per share dropped by 20%. ADP's ability to maintain and grow its DPS consistently showcases strong financial health, stable earnings, and a sustainable dividend policy, desirable for income-seeking investors. This trend bodes well for investors seeking stable and predictable returns.

Dividends Paid for Over 25 Years?

Assesses the company's dividend payment history over the last 25 years, a crucial indicator of its long-term financial health and reliability.

Automatic Data Processing (ADP) meets this criterion emphatically. The data shows that ADP has not only consistently paid dividends for over 25 years but has also shown a remarkable upward trend in dividends per share. For instance, the dividends per share increased from $0.2173 in 1998 to $5.15 in 2023. This sustained and rising dividend payment history underscores ADP's robust financial performance and commitment to returning value to its shareholders, making it an attractive option for long-term, income-focused investors.

Reliable Stock Repurchases Over the Past 20 Years?

Stock repurchases refer to a company buying back its own shares from the marketplace, which reduces the number of outstanding shares. This is important as it can indicate the company's management's confidence in its future performance and its attempt to return value to shareholders.

Over the past 20 years, Automatic Data Processing (ADP) has consistently repurchased its shares, as evidenced by the reduction in shares from 605.9 million in 2003 to 413.7 million in 2023. This results in an average annual decrease of 1.8815%, highlighting ADP's commitment to enhancing shareholder value through returning capital. This consistent trend suggests strong and reliable repurchase activity, reflecting the management's confidence in the company's financial health and future prospects. Nearly every year within this period saw a repurchase, except for the initial instances where shares were relatively stable, bolstering the company's approach towards maintaining robust capital management practices. This is a positive indicator as it demonstrates a shareholder-friendly management team committed to driving value creation over the long term. With such a steady buyback history, investors can gain confidence in ADP's proactive measures to manage share dilution and enhance per-share performance metrics.