ADP(NASDAQ: ADP) is an elite dividend stock. The leading payroll and human capital management (HCM) solutions provider raised its payout for the 49th straight year in 2023. This year should be its 50th year of dividend growth, which would put it into the noble class of Dividend Kings.
What's even more impressive about ADP is that it hasn't been making a habit of giving investors paltry annual raises to keep its streak alive. For example, it raised its payment by 12% last year. Add in its above-average dividend yield (2.4% compared to an average of 1.5% for the S&P 500), and ADP is a great stock for those seeking an attractive and steadily rising income stream.
A financial fortress
ADP is a global leader in providing HCM software and solutions. It has over 1 million clients across 140 countries, and provides payroll services for more than 41 million workers. The company's business generates lots of recurring revenue and cash flow, partly thanks to its strong client retention rate (92.2% in its fiscal 2023, which ended June 30). It generated $18 billion in revenue during its last fiscal year (up 9%) and $4.2 billion in cash flow (up nearly 36%). It paid less than half that cash flow in dividends ($1.9 billion), leaving ample excess cash to fund growth-related investments and return additional money to investors through share repurchases.
The company also has an elite balance sheet. It ended its fiscal 2023 with over $2 billion in cash against around $3 billion in debt. That backs its exceptional credit rating (AA-/Aa3). ADP's financial fortress puts its dividend on an extremely firm foundation.
Lots of growth ahead
ADP is already the category leader in most of the markets in which it participates. However, that doesn't mean it doesn't have a long growth runway. The company estimates that the total addressable market opportunity for its HCM solutions is $150 billion. Further, it expects the market to grow by 5% to 6% annually. With its revenue reaching $18 billion last year, it still has plenty of room to grow.
The company currently expects its revenue to rise by 6% to 7% in fiscal 2024 as it captures more of its large and steadily growing addressable market. That should drive 10% to 12% earnings-per-share growth. Those numbers align with the medium-term growth targets it outlined at its last investor day in 2021, which were 7% to 8% annual revenue growth and 11% to 13% adjusted earnings-per-share growth.
That forecast suggests ADP should be able to continue growing its dividend at an above-average rate. The company is targeting a dividend payout ratio of 55% to 60% of its adjusted earnings. (It was right around 60% in its fiscal 2023.) ADP should have a similar payout ratio in fiscal 2024, given its recent 12% dividend increase and expectations that earnings will rise by 10% to 12% in the current fiscal year.
Meanwhile, with a medium-term earnings growth rate of 11% to 13% and a payout ratio in the neighborhood of its current level, ADP could continue raising its dividend at double-digit percentage rates in the coming years. That's a strong growth rate, considering the current expectation that companies in the S&P 500 will, on average, grow their dividends by around 6% annually over the next few years.
That sets ADP up to potentially produce attractive total returns. With a more than 2% dividend yield and double-digit earnings and dividend growth, the HCM solutions provider could deliver an average annual total return percentage in the low-to-mid teens.
A top-tier dividend stock
ADP appears to be a lock to reach Dividend King status in 2024. And its streak of payout hikes should continue beyond this year, given the company's fortress-like financial profile and strong growth prospects. Add in its above-average yield, and ADP looks like a great dividend stock to buy. It can produce an attractive, steadily rising income stream while offering compelling total return potential.
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Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
