Dividend Prince Automatic Data Processing Hits Bottom

Key Points

• Automatic Data Processing had a good quarter and raised guidance. 
• Capital returns are healthy and on track to continue in 2023 and 2024.
• The analysts are still lowering price targets and may weigh on the action until later in the year. 

If you’ve been wondering when Automatic Data Processing NASDAQ: ADP will hit bottom, it looks like it is in. The pre-Q3 earnings release price action and the report scream bottom and have the stock set up for a reversal. The question that needs to be answered is if this reversal is from down to up or down to sideways, as is often the case. In that event, shares of ADP stock are likely to trend sideways at current levels while paying the 2.35% dividend yield and buying back shares.

This will help it set up a base of support for when it next increases the payout. The subsequent increase will be the 49th consecutive increase, putting the company on track to be crowned Dividend King in 2024. 

"With continued healthy Employer Services new business bookings, client revenue retention, and U.S. pays per control growth in the third quarter, we are positioned for strong overall fiscal 2023 results," said Don McGuire, Chief Financial Officer, ADP. "As we look ahead, we remain focused on driving profitable growth as we invest in our business to accelerate our progress on our modernization journey and to capitalize on our substantial secular growth opportunity."

Automatic Data Processing Raises Guidance 

Automatic Data Processing had a solid quarter and increased its guidance. The company reported $4.9 billion in revenue, up 8.9% compared to last year, on strength in Employer Services. The Employer Services group gained 11% compared to last year and was offset by a slower 5% in the PEO segment. Organically, the company grew by 10% and another 1% when FX was added back in. 

The margin news is also favorable and includes a 110 basis point improvement in the adjusted EBITDA margin. This led to a 12% increase in net income and a 14% increase in adjusted earnings. The adjusted earnings came in at $2.52, beating the Marketbeat.com consensus by 320 basis points and outpacing the top-line strength. This led management to raise the guidance, but this news is mixed. Revenue is expected in a range that brackets the consensus estimate perfectly, while EPS is expected to grow by at least 16% in Q4 compared to the 15.75% expectation. 

This should lead to upward revisions from the analysts, but the opposite is true. Two price reductions have been issued, both below the consensus figure. The analysts are Holding the stock and at least see it fairly valued at current levels, but they may limit upside potential in the near to short term. The most significant risk is that recession looms over the economy, and labor data is often lagging. Layoffs are on the rise, which may accelerate as the year progresses. 

Automatic Data Procesing On Track For Capital Returns 

Automatic Data Processing may have a cloudy outlook regarding growth, but the capital returns are safe. The company’s cash flow allowed it to build cash while paying down debt, paying the dividend and buying back shares. The dividend payout ratio is on the high side at 55%, so a slow-down in the pace of increases might be coming, but it and repurchases should continue through the end of the year and into next year. Repurchases were worth about 1% of the market cap during the quarter. 

The price action is favorable despite the price target reductions. The stock shows solid support at a critical long-term target and is moving higher now. Assuming the market follows through on this signal, the stock could gain $5 to $20 or about 10% soon. Longer-term, this stock may be range bound near current levels until the economy is more clear.