Automatic Data Processing (NASDAQ: ADP) is one of four remaining American companies with a Triple A credit rating from the major credit rating agencies. The other firms include Microsoft (NASDAQ:MSFT), Johnson & Johnson (NYSE:JNJ) and Exxon Mobil (NYSE:XOM). The Triple A rating is actually greater than the U.S. government which was downgraded in August by Standard and Poors.
Based on the implications of its credit rating, ADP actually provides a higher dividend yield than the U.S government as well. With a market price just over $50 a share, ADP’s dividend is close to 3%. That compares favorably to the U.S. government bonds which only provide a 2% return on the 10 year note and even less on shorter time frames. In addition, the Trefis team has set a target price of $57.67 for the stock. That means there is potential for an additional 10 – 15% gain on the stock as well.
Balance Sheet and Business Drive Value for ADP
The company was granted such a high rating due to its strong underlying business and excellent balance sheet. ADP has almost $1.3 billion in cash and only $36 million in debt. This ratio virtually guarantees that the firm will not go bankrupt in the short-term. ADP’s business model provides payroll processing services to small, medium and large enterprises throughout the world. Payroll processing actually constitutes 87% of the company’s revenues.
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The company charges about $213 per employee for payroll processing which Trefis predict to grow to about $300 by 2018. In addition, the firm has a solid 28% operating margin based on its automated processing business. This margin ensures a healthy, profitable business that can provide a better upside and a greater dividend than U.S. government bonds currently offer.