No Debt and High Yield Make Automatic Data Processing Inc. (Nasdaq: ADP) a "Buy"

By: Money_Morning

Jack Barnes writes: Most people aren't incredibly familiar with Automatic Data Processing Inc. (Nasdaq: ADP), but it's a company every investor should know.

You see, ADP, which provides payroll and human resources services to businesses, has two important traits that investors need in their portfolios right now.

First, it has virtually no debt. Its unleveraged balance sheet has made it one of the few U.S. companies with a AAA credit rating from Standard & Poor's. It also has a perfect credit rating from Moody's Corp. (NYSE: MCO).

Companies with such a high rating from S&P are rare, and the number of countries with that rating is dwindling. Even the United States is no longer in the AAA group. But this isn't the only special category in which ADP belongs.

It's also a "Dividend Aristocrat." This is the title Standard & Poor's gives companies that boast a AAA rating and have a history of raising their dividends for at least 25 years. There are currently only three U.S. stocks that are both "Dividend Aristocrats" and have a AAA rating from S&P - two things investors should look for in this volatile environment.

That's why it's time to buy Automatic Data Processing, a debt-free, steady dividend payer with a solid future. (**)

Automatic Data Processing Inc.: Safe and Profitable
The once-deep list of U.S.-listed AAA companies has dwindled to a small group of four. I've recommended a couple of them before -Microsoft Corp. (Nasdaq: MSFT) and Exxon Mobil Corp. (NYSE: XOM). Johnson & Johnson (NYSE: JNJ) is the fourth.

These stocks are among the safest you can find. Safety isn't easy to come by with the economy looking as it does, but these companies have positioned themselves for long-term survival. You can be pretty sure that years from now Microsoft and Exxon will still be around, generating profits.

ADP likely will, too. It's a profitable and growing company. ADP is in an industry that isn't likely to disappear. It also has a high client-retention rate, and the high cost incurred by companies that switch to another back-office service provider is a huge deterrent to leaving.

It also has a long history of regularly paying its dividend.

Today, ADP pays out 3%, and is expected to increase that rate over time. It announced Nov. 8 it would increase the next dividend payout by 10%. ADP is one of the few companies with the capacity to increase its yield significantly since it has no outstanding debt. It pays about 56% of its earnings as dividends.

ADP recently got a new chief executive officer, long-time employee Carlos Rodriguez, who was being groomed for the position for years. Rodriguez replaces former leader Gary C. Butler, who retired suddenly last month. The transition has been handled incredibly well, even with many questions surrounding Butler's exit.

ADP on Oct. 26 reported revenue of $9.9 billion and earnings per share (EPS) of $2.52 for fiscal 2011.Gross profit hit more than $4 billion. It expects revenue growth of 7% to 9% in 2012 and EPS growth of 8% to 10%.

The company has a market cap of $23.8 billion with an enterprise value of $22.8 billion once net cash and debt levels are taken into consideration. That's a serious surplus of cash.

Its stock is up 13% so far this year. Market researcher Trefis gives it a price target of $57.67, about a 10% premium to where it's trading now.

Action to Take: Buy Automatic Data Processing Inc. (Nasdaq: ADP) (**).

Automatic Data Processing Inc. has enough liquidity that we should pick up our position at market prices. The stock is stable despite the current market downdrafts (fitting for a AAA-rated company).

Let's go ahead and take a full position on the stock, instead of buying some shares now and some later.
We can use the options market to generate additional cash flow from this position if we want. Covered calls are used by some investors with a company that isn't expecting a major breakout. When you compound the results of the original dividend with a covered call strategy, you can generate a significantly higher rate of return than the return generated by the share price.

(**) Special Note of Disclosure: Jack Barnes has no interest in Automatic Data Processing Inc. (Nasdaq: ADP).
About the Writer: Columnist Jack Barnes started his career at Franklin Templeton in 1997. He started out in the company's fund-information department - just as the Asian contagion infected the Asian tiger countries.

Barnes launched his own shop, RIA, in 2003, just as the second Gulf War was breaking out. In early 2006, after logging a one-year return of nearly 83%, Forbes named Barnes the top stock picker in its "Armchair Investors Who Beat the Pros" competition. His two audited hedge funds generated double-digit returns in 2008.

Barnes retired to the beach in the summer of 2009, and continues to write from there. He's now the author of the popular blog, "Confessions of a Macro Contrarian," and his "Buy, Sell or Hold" column appears in Money Morning on Mondays. In his previous BSH column, Barnes analyzed Anadarko Petroleum Corp. (NYSE: APC).

Source :http://moneymorning.com/2011/12/12/n..

Money Morning/The Money Map Report

©2011 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.