Image source: Pixabay

We are maintaining our "buy" rating on Automatic Data Processing Inc. (ADP) with a revised 12 month target price of $250, raised from $225.

Automatic Data Processing, based in Roseland, New Jersey, is a leading cloud-based business services company. The firm is focused on Human Capital Management (HCM);  it provides payroll services to companies and employment administration outsourcing solutions such as benefit management, human resources, retirement, and compliance programs.

ADP has a clean balance sheet and an experienced management team — two factors that we think are important during the pandemic. The company also has an impressive record of growing its dividend, which currently yields about 1.7%, and has raised its payout for 44 straight years.

In November 2020, it raised its quarterly payout to $0.93 per share, or $3.72 annually. The yield is about 1.8%. Our dividend estimates are $3.80 for FY22 and $3.88 for FY23.

On Oct. 27, the company reported that fiscal Q1'22 revenue rose 10% year-over-year to $3.8 billion (also up 10% on an organic constant-currency basis). Adjusted EBIT rose 17% and the adjusted EBIT margin increased 140 basis points to 23.9%. Adjusted diluted EPS from continuing operations rose 17% to $1.65. Our estimate was $1.50.

Based on recent trends in sales, orders, and margins, we are raising our FY22 EPS estimate to $6.77 from $6.52. We are raising our FY23 estimate to $7.25 from $7.15. Our long-term EPS growth rate forecast is 9%.

We rate the financial strength of ADP as High, the top of our five-point scale. ADP scores well above average on our main financial strength criteria: debt levels, fixed-cost coverage, profitability, cash flow generation, and earnings quality. The company is rated Aa3/stable by Moody’s and AA-/stable by S&P.

The shares have been in a long-term bullish pattern of higher highs and higher lows with a brief interruption to that trend during the pandemic lows in March 2020.

Valuations are reasonable for ADP, and the company has rewarded investors over time with consistent results and market-beating returns. We think that ADP shares are suitable as a core portfolio holding in diversified accounts.