ADP – An Overvalued Dividend Aristocrat

YTD adjusted EPS (non-GAAP) is $4.82 and FY2021 adjusted diluted EPS (non-GAAP) guidance is ~$5.92. On the basis of the current ~$191 share price, the forward adjusted diluted P/E is ~32.3. Adjusted diluted EPS guidance from 21 brokers is a mean of $5.95 and a low/high range of $5.88 – $6.00. Using guidance from these brokers, the forward adjusted diluted /PE range is ~31.8 – ~32.5.

I am looking for the share price to retrace to at least ~$160. At this level, the P/E is ~28. Even this valuation is slightly high but I think ADP stands to benefit from higher employment levels as the global economy recovers. Furthermore, an uptick in interest rates will be to ADP’s advantage because of its Client Funds Investment Strategy.

Peer Valuation – Paycom

Paycom Software, Inc. (PAYC), one of ADP’s peers is trading at a ridiculous valuation; PAYC is not rated by the major rating agencies.

Shares are currently trading at ~$401 and FY2021 adjusted earnings guidance from 14 brokers is a mean of $4.18 and a low/high range of $3.90 – $4.32; keep in mind these are adjusted earnings forecasts. In FY2019 and FY2020, Paycom’s adjusted earnings exceeded GAAP earnings by $0.41/share and $1.03/share. A significant degree of these variances is attributed to ‘Non-cash stock-based compensation expense’.

Being generous and giving Paycom Software the benefit of the doubt that FY2021 GAAP earnings will be the same as FY2021 guidance. Based on the current ~$400 share price, the forward PE is ~95.7 (using the mean of $4.18).

Any investor who thinks this valuation is reasonable should find someone who invested in Intel Corporation (INTC) or Cisco Systems (CSCO) at the height of the .com days. Investors would be wise to pay heed to a company’s valuation!

ADP – An Overvalued Dividend Aristocrat – Final Thoughts

In my opinion, ADP is a great company in which to invest. My concern is that it might be difficult to achieve a reasonable rate of return if shares are acquired at the current valuation. ADP clearly is overvalued and despite being a Dividend Aristocrat the stock should probably be placed on your watch list. There are periods off times that companies like ADP are overvalued but inevitably reversion to the mean occurs and there may better entry points in the future.

In Charlie Munger’s 13 Personal Attributes To Improve Investment Success post, Munger identifies Patience and Discipline as key attributes. I think it is wise to heed Munger’s advice. Wait until ADP’s valuation based on P/E retraces to the high 20s which, based on FY2021 guidance, is ~$160.

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Disclosure: I am long ADP, PAYX, BR, CDK, and CSCO.

Disclaimer: Dividend Power is not a licensed or registered investment adviser or broker/dealer. We are not providing you with ...

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