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Automatic Data Procs(ADP-Q)

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Get Rich With This Boring but Unstoppable Stock

Motley Fool - Sat Dec 16, 2023

Do you enjoy investing? Or is it merely a means to an end?

It's fine if you're a so-called market junkie, following the market's daily headlines and keeping a constant eye out for the next hot story stock. There's also nothing wrong with a boring, passive approach to picking stocks. Indeed, often times the "less is more" crowd ends up with better returns than active investors.

There's a largely overlooked name more investors might want to consider adding to their portfolio regardless of their long-term goals and risk tolerances. Shares of boring payroll processor outfit Automatic Data Processing(NASDAQ: ADP) are up an incredible 240% for the past 10 years, with more of the same likely in the cards for the next 10.

Automatic Data Processing is on a roll

Shares of Automatic Data Processing -- you may know it better as just ADP -- have more than tripled in value since this point in 2013. For comparison, the S&P 500 is up roughly the same amount for the same time frame. Most of the S&P 500's gains were driven by growth stocks though, whereas ADP is more of a value name. Factoring in ADP's better dividend payments, what you're left with is a surprisingly strong performance from a stock not too many investors think much about.

Just as the name suggests, Automatic Data Processing offers a variety of processing services. It's best known for handling payroll duties for medium and large businesses, although that's far from all it does. The company provides a variety of other human resources services, too, like recruiting, benefits program management, employee time clocks, tax matters, contract worker paperwork, work-related credentials, and more. It's truly a turnkey HR solution for enterprises looking to focus more on their products and services and worry less about human logistics stuff.

Boring? You bet.

Don't presume there's no growth in a boring business though. Companies of all shapes and sizes are increasingly turning to third parties to handle increasingly complicated human resources functions. In step with its stock's 240% gain over the course of the past decade, ADP's annualized revenue has grown from $11 billion to more than $18 billion, while net income has exploded from a little over $1.4 billion per year to just under $3.5 billion. Per-share profits have grown even more thanks to big-time stock buybacks, from less than $3 then to $8.42 per share for the four-quarter stretch ending in September.

ADP Revenue (Quarterly) Chart

ADP Revenue (Quarterly) data by YCharts

Perhaps even more bullish than the company's long-term growth, however, is the consistency of its growth. Note that with the exception of 2013's reporting of revenue-crimping asset sales initiated in 2012 and the impact of COVID-19 shutdowns in the first half of 2020, Automatic Data Processing hasn't failed to report year-over-year sales growth in any quarter in years. Operating income and net income have grown almost as reliably.

This actually makes sense though. ADP's business model generates recurring revenue ultimately based on the scope of services performed. Its clients are billed on a monthly basis, and its revenue retention rate reached record-breaking levels of more than 92% during the fiscal year ending in June. Once a customer is on board, they tend to stay on board.

The kicker: Automatic Data Processing is sharing the wealth in the meantime, and has plenty of it to share. The stock's quarterly per-share dividend has grown from $0.435 10 years ago to $1.40 now. Even with that annualized growth rate of more than 12%, however, the dividend still only consumes around two-thirds of the company's profits. The rest of its earnings can be used to add value in other ways, like the aforementioned stock buybacks, the acquisition of other companies, or simply reinvesting in technologies that drive more growth.

Just buy ADP already and forget about it

If you're looking for thrills and entertainment, look elsewhere -- ADP doesn't offer it. The company isn't working on any game-changing technologies or miracle drugs. It's not dishing out double-digit revenue or earnings growth. By most measures, it's a relatively boring stock.

It's a boring stock, however, reflecting a powerhouse company operating in an industry with a strong foundation and lots of opportunity for continued expansion.

See, the world's always going to need workers, and there's little reason to think more and more companies aren't going to reach a point where they simply decide to punt most -- if not all -- of their human resources functions to third parties like ADP. In this vein, market research outfit Technavio believes this business is set to grow at an annual pace of 5.6% through 2027. Given its current dominating footprint, Automatic Data Processing is positioned to capture more than its fair share of this growth.

Just don't tarry if you want in. The stock's still trading where it was as of late 2021. It doesn't seem likely the market's going to let this one linger there for a whole lot longer though.

Should you invest $1,000 in Automatic Data Processing right now?

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James Brumley 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.

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