Stock Analysis

Is It Worth Considering Automatic Data Processing, Inc. (NASDAQ:ADP) For Its Upcoming Dividend?

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NasdaqGS:ADP
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It looks like Automatic Data Processing, Inc. (NASDAQ:ADP) is about to go ex-dividend in the next four days. Investors can purchase shares before the 11th of March in order to be eligible for this dividend, which will be paid on the 1st of April.

Automatic Data Processing's upcoming dividend is US$0.93 a share, following on from the last 12 months, when the company distributed a total of US$3.72 per share to shareholders. Based on the last year's worth of payments, Automatic Data Processing stock has a trailing yield of around 2.1% on the current share price of $178.26. If you buy this business for its dividend, you should have an idea of whether Automatic Data Processing's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.

See our latest analysis for Automatic Data Processing

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Automatic Data Processing paid out 63% of its earnings to investors last year, a normal payout level for most businesses. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. It paid out more than half (62%) of its free cash flow in the past year, which is within an average range for most companies.

It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

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NasdaqGS:ADP Historic Dividend March 6th 2021

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If earnings fall far enough, the company could be forced to cut its dividend. For this reason, we're glad to see Automatic Data Processing's earnings per share have risen 15% per annum over the last five years. Automatic Data Processing is paying out a bit over half its earnings, which suggests the company is striking a balance between reinvesting in growth, and paying dividends. This is a reasonable combination that could hint at some further dividend increases in the future.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Automatic Data Processing has delivered an average of 11% per year annual increase in its dividend, based on the past 10 years of dividend payments. It's exciting to see that both earnings and dividends per share have grown rapidly over the past few years.

Final Takeaway

Is Automatic Data Processing an attractive dividend stock, or better left on the shelf? It's good to see earnings are growing, since all of the best dividend stocks grow their earnings meaningfully over the long run. That's why we're glad to see Automatic Data Processing's earnings per share growing, although as we saw, the company is paying out more than half of its earnings and cashflow - 63% and 62% respectively. Overall, it's not a bad combination, but we feel that there are likely more attractive dividend prospects out there.

Curious what other investors think of Automatic Data Processing? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow.

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.

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What are the risks and opportunities for Automatic Data Processing?

Automatic Data Processing, Inc. provides cloud-based human capital management solutions worldwide.

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Rewards

  • Earnings are forecast to grow 8.1% per year

  • Earnings grew by 14.7% over the past year

Risks

  • Has a high level of debt

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