Automatic Data Processing Stock Delivers Strong Cash Yield – Upside Ahead?
Automatic Data Processing (ADP) could be a good pick for your portfolio, with its high cash yield, good fundamentals, and discounted valuation. Companies like this can use cash to fuel additional revenue growth or simply pay their shareholders through dividends or buybacks. Either move makes them attractive to the market
ADP Has Good Fundamentals
- Good Cash Yield: Not many stocks offer free cash flow yield of 5.5%, but Automatic Data Processing stock does
- Strong Margin: Last 12 month operating margin of 26.3%
- Growth: Last 12 months’ revenue growth of 6.6% – low growth, but this selection is all about high yield and margin
- Valuation: ADP stock is currently trading at 41% below its 2Y high, 11% below its 1M high, and at a PS lower than the 3Y average.
Below is a quick comparison of ADP fundamentals with S&P medians.
| ADP | S&P Median | |
|---|---|---|
| Sector | Industrials | – |
| Industry | Human Resource & Employment Services | – |
| Free Cash Flow Yield | 5.5% | 4.4% |
| Revenue Growth LTM | 6.6% | 6.8% |
| Revenue Growth 3YAVG | 7.1% | 5.5% |
| Operating Margin LTM | 26.3% | 18.6% |
| Operating Margin 3YAVG | 25.9% | 18.1% |
| PE Ratio | 18.0 | 24.1 |
*LTM: Last Twelve Months
- How ADP Stock Could Soar 50%
- Strong Cash Yield: Is Automatic Data Processing Stock A Buy?
- Would You Still Hold Automatic Data Processing Stock If It Fell Another 30%?
- Automatic Data Processing Stock Pulls Back to Support – Smart Entry?
- Automatic Data Processing Stock Capital Return Hits $28 Bil
- Automatic Data Processing Stock at Support Zone – Bargain or Trap?
But What Is The Risk Involved?
While ADP stock may be a compelling investment opportunity, it’s always helpful to be aware of a stock’s history of drawdown. ADP took a hit of about 36% in both the Dot-Com crash and the Global Financial Crisis. In 2018’s correction, the drop was milder, around 19%, but still notable. The Covid sell-off knocked it down nearly 40%, the biggest dip on this list. Even the inflation shock in 2022 pushed the stock down more than 21%. So, despite ADP’s solid fundamentals, these numbers remind us that no stock is immune when the market turns south. But the risk is not limited to major market crashes. Stocks fall even when markets are good – think events like earnings, business updates, outlook changes. Read ADP Dip Buyer Analyses to see how the stock has recovered from sharp dips in the past.
For more details and our view, see Buy or Sell ADP Stock.
Stocks Like ADP
Not ready to act on ADP? Consider these alternatives:
We chose these stocks using the following criteria:
- Greater than $2 Bil in market cap
- Dipped last month & meaningfully below 2Y high
- Current P/S < last few years average
- Strong operating margin with no instances of large margin collapse
- High free cash flow yield
A portfolio of stocks with the criteria above would have performed as follows since 12/31/2016:
- Average 6-month and 12-month forward returns of 10.4% and 20.4%, respectively
- Win rate (percentage of picks returning positive) of about 74% for 12-month period
- Strategy consistent across market cycles
The Best Investors Think In Portfolios
Individual stocks can soar or tank, but one thing matters: staying invested. The right portfolio can help you stay invested, capture upside, and mitigate the downside associated with any individual stock.
The Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has a track record of comfortably outperforming its benchmark that includes all 3 – the S&P 500, S&P mid-cap, and Russell 2000 indices. Why is that? HQ Portfolio has posted more than 105% in cumulative return since inception, with less risk versus the benchmark index, as evident in HQ Portfolio performance metrics.