Dividend Increase | Automatic Data Processing (ADP)

Dividend | Dividend Growth | Financial Independence | Freedom | Passive Income
Getting a pay raise while sitting on the couch?  Sign me up!  Thanks ADP for the dividend increase!
There's an old Chinese proverb that says "the best time to plant a tree was 20 years ago, the next best time is now".  The reason for this is that it takes time for a tree to grow and prosper and for you to start reaping its benefits.  Dividend growth investing is much the same way.  It takes consistent saving and investing as well as time and patience to let the power of dividend growth take hold.

That's why one of my favorite things is when one of the companies I own decides to pay out more in dividends.  You mean I get a pay raise just for owning a small piece of a company?  Not going and doing R&D for new products or technology.  Not selling any products.  Not managing any employees or inventory.  Not making sales calls.  All I had to do was have the foresight to invest some of my savings in excellent companies.  

On November 12th the Board of Directors at Automatic Data Processing approved an increase to the quarterly dividend payment.  The dividend was increased from $0.79 up to $0.91 per share.  You know, just a 15.2% raise!  Automatic Data Processing is a Dividend Champion with 44 consecutive years of dividend increases.  Shares currently yield 2.19% based on the new annualized payout.

The newly increased dividend will be payable on January 1st to shareholders of record as of December 13th.

Since I own 6 shares of Automatic Data Processing in my FI Portfolio, this raise increased my forward 12-month dividends by $2.88.  This is the 1st dividend increase I've received from ADP since initiating a position in October.  

A full screen version of this chart can be found here.

Automatic Data Processing has a lengthy dividend growth streak coupled with tremendous growth over the long term.  That's 2 characteristics that I love from my investments.

Of the 28 1-year periods starting in 1991 annual dividend growth has ranged from 3.6% to 33.0% with an average of 14.4% and a median of 14.9%.  As a payroll processing business and thus a business that is tied more to the whims of the economy, I'm not surprised to see a large range of dividend growth.

Of the 24 rolling 5-year periods dividend growth smooths out a bit ranging from 7.6% to 21.0% with an average of 13.4% and a median of 13.5%.

Likewise the 19 rolling 10-year periods have annualized dividend growth ranging from 8.8% to 18.1%.  The average rate works out to 13.5% while the median is 14.0%.

The 1-, 3-, 5- and 10-year rolling dividend growth rates since 1991 can be found in the following chart.  

A full screen version of this chart can be found here.

For dividend yield theory I consider the fair value range to be the forward dividend yield +/- 10% compared to the 5 year moving average, the under/over value area to be to between 10%-20% deviation from the average and significant over/under value are greater than a 20% deviation from the average.

A full screen version of this chart can be found here.

Automatic Data Processing's 5-year moving average forward dividend yield is 2.22%.  Based on the new annualized dividend a "fair" price for Automatic Data Processing shares would be $163.96.

The fair value range based on dividend yield theory is $149 - $182 assuming historic yield levels are indicative of future yield levels.  The current yield of 2.19% is in the 63rd percentile since 1990 meaning that 37% of the time shares have offered a higher starting yield.

When looking at some common valuation multiples Automatic Data Processing isn't cheap, but I do believe it's in the realm of fair value under normal conditions.

Based on current year estimates for the fiscal year ending in June 2020 and a share price of $165.77 the P/E multiple sits at 26.9x.  Looking out to fiscal year 2021 the forward P/E is 23.9x.  The EV/EBITDA multiple sits at 20.2x which is definitely on the higher side, but ADP is a very capital and asset light business so it's deserving of a premium multiple.

Analysts expect ADP to grow earnings 14.9% per year over the next 5 years.  As a rough estimate of the 5-year annual returns that an investment can provide we can add the starting dividend yield of 2.2% to the earnings growth estimate of 14.9% and get 17.0% annualized returns before accounting for any valuation changes.

You can read my full valuation analysis on Automatic Data Processing over on Seeking Alpha.

Wrap Up

This raise increased my forward dividends by $2.88 with me doing nothing.  That's right, absolutely nothing to contribute to their operations.  Based on my portfolio's current yield of 2.94% this raise is like I invested an extra $98 in capital.  Except that I didn't!  One of the companies I own just decided to send more cash my way.  

That's how you can eventually reach the crossover point where your dividends received exceed your expenses.  That's DIVIDEND GROWTH INVESTING AT WORK!  The beauty of the dividend growth investing strategy is that you build up your dividends through fresh capital investment as well dividend increases from the companies you own.

Thus far in 2019 I've received 45 raises from 40 of the 55 companies in my FI Portfolio.  Combined the dividend increases have boosted my forward 12-month dividends by $315.35.

My FI Portfolio's forward-12 month dividends climbed to $7,710.89.  Including my FolioFirst portfolio's forward dividends of $101.08 brings my total taxable accounts dividends to $7,811.97.  My Roth IRA's forward 12-month dividends remain at $619.71.  My Rollover IRA's forward dividends remain at $2,316.43.  Across all accounts I can expect to receive $10,748.11 in dividends over the next year.

I've also started compiling dividend data on many of the companies that I own or would like to own.  Automatic Data Processing's can be found here which includes the dividend history (as far back as I can find without spending hours hunting it down), rolling dividend growth rates and dividend yield theory.  To see other companies that I've already gathered the data on you can check out the Dividend Companies page.  Check it out and let me know what you think.

Do you own shares of Automatic Data Processing?  

Please share your thoughts below.