Automatic Data Processing: Slow but Steady Wins the Race
February 2, 2024
3 min read
"Do you know the only thing that gives me pleasure? It is to see my dividends coming in."
– John D. Rockefeller
arvy's teaser: ADP, the stalwart of human resources and payroll solutions, is not just a dividend aristocrat; it is on the cusp of becoming a dividend king, having increased dividends for 48 consecutive years. In a world chasing the 'next big thing,' ADP's steady growth, resilience through recessions, and remarkable client retention underscore the power of slow and steady in the market.
Automation.
It is needed for cumbersome, repetitive and time-consuming tasks.
Anyone who has ever founded their own company, hired employees or been in the process of doing so knows how complicated and complex the labor law regulations are. Not only do you have to find the right people, which is a major challenge in itself, but you also have to make sure that you do not neglect all legal obligations such as AHV, accident insurance and so on. This would be very costly and nerve-wracking. Small and medium-sized companies in particular are looking for a solution. They are not able to cover all these tasks and feel the need to outsource non-essential activities to a trustworthy partner. After all, you should be able to concentrate on your core business.
But there is a savior in need!
A big player with more than 70 years' experience in human resources and payroll, supporting a million businesses with data-driven advice and technologically advanced tools, whether they have one or thousands of employees.
The king of payroll and human resources management solutions (chart 1).
Automatic Data Processing.
In short: ADP.
Chart 1: ADP’s revenue and earnings before interest and taxes (EBIT)
A dividend king in the making
Given its very interesting business characteristics of steady growth, high stability and visibility, ADP has shown a rare commitment to market participants.
The company is an attractive choice for income investors. It is a “dividend aristocrat” paying a dividend of 2.4% (chart 2).
In the investing world, a dividend aristocrat is a company that has a long history of paying dividends and consistently increasing them – at least 25 years in a row. In the S&P 500, there are 67 members in this club.
The leader in payroll accounting and human capital management solutions increased its dividends for 48 consecutive years. The company is on its way to the last major milestone – dividend king status. This is obtained by raising dividends every year for 50 years.
There are only 51 US companies, and perhaps a few more in the rest of the world, that have this status.
Quite impressive when you look at history.
Chart 2: ADP’s dividend yield and dividend per share since 1990
Source: Koyfin
Stability in an unstable world
At arvy, we prefer reinvesting in one’s own business than paying dividends. Nevertheless, being able to reward shareholders with a dividend increase for over half a century is no small feat.
Over the past 50 years, some catastrophes experienced include:
- Seven Recessions since 1967
- Oil crisis in the 1970s
- Stagflation of the 1970s
- Dot-com bubble bursting in 2000
- Housing bubble bursting in 2007 – 2008
- Covid-19 Pandemic
This shows two things.
First, you do not have to chase the “next big thing” to make money in the stock market. Second, so-called boring and old companies that survived major events like two world wars, the Great Depression (1929) and the Great Inflation (1965-1982) can be excellent compounders. Slow but steady wins the race.
If you are still wondering where to get the list of names, I will save you the trouble (chart 3).
My pleasure!
Chart 3: Dividend Kings by Sector and Years of Dividend Growth
Source: Simply Safe Dividends
A moaty business
Payroll and human capital management software tends to be deeply embedded in an organization’s business processes, so switching vendors is costly and time-consuming.
As a result, ADP has not one but three moats:
- High customer switching costs
- Brand strength (intangible asset)
- Economies of scale
All this is reflected in high recurring revenues and the best customer retention rates in the industry of 91% over the last ten years.
In addition, it even works with other competitors such as Intuit’s QuickBooks accounting software to offer upselling modules and further increase customer loyalty.
ADP's products target highly sensitive and business-critical operations for all organizations that place a high value on reliability, accuracy, compliance and data security.
Through continuous improvement over decades, ADP has positioned itself as an important partner that enjoys countless recommendations.
The best form of praise and customer satisfaction you can achieve.
ADP is a friend that keeps on giving.
Chart 4: ADP over 10 years
Source: TradingView
