Dividend Increase | Automatic Data Processing (ADP)

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 10th the Board of Directors at Automatic Data Processing (ADP) approved an increase in the quarterly dividend payment.  The dividend was increased from $0.93 to $1.04 which is an excellent 11.8% increase.  ADP is a Dividend Champion with 46 consecutive years of dividend growth.  Shares currently yield 1.81% based on the new annualized payout.

The new dividend will be payable January 1st to shareholders of record as of December 10th.

Since I own 17.699 shares of ADP in my FI Portfolio, this raise increased my forward 12-month dividends by $7.79.  This is the 3rd raise I've received from ADP since initiating a position in 2019.  Total organic dividend growth over that time is an impressive 31.7%.

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

Dating back to 1991, ADP's year over year dividend growth has ranged from 3.6% to 33.0% with an average of 14.0% and a median of 13.9%.

Over that same period there's been 26 rolling 5-year periods with annualized dividend growth ranging from 7.6% to 21.0% with an average of 13.4% and a median of 13.3%.

There's also been 21 rolling 10-year periods with annualized dividend growth ranging from 8.8% to 18.1% with an average of 13.2% and a median of 13.6%.

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.

ADP's 5-year average forward dividend yield is 2.14% which corresponds to a share price of $194 based on the new annualized payout.  

I consider the fair value range based on dividend yield theory to be the 5-year moving average yield +/- 10%.  That gives a fair value range of $176 - $216 and suggests that shares are trading above fair value.

Another quick and dirty valuation method is the Gordon Growth or Dividend Discount model.  This valuation method is based solely off the expected future dividends as well as your required return.  Based on a 8% discount rate and assuming ADP can maintain 6.0% annual dividend growth shares are worth around $220 per share.

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

The above chart shows the DDM valuation using the 6.0% growth rate and 8% discount rate in comparison to the share price over time.

Automatic Data Processing is a great company; however, I believe that the share price is a bit ahead of itself at this time.  You can read my recent dividend stock analysis of ADP over on Seeking Alpha.

  




Wrap Up

This raise increased my forward dividends by $7.79 with zero effort on my part.  That's right, absolutely nothing to contribute to their operations.  Based on my FI Portfolio's current yield of 2.25% this raise is like I invested an extra $346 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.

I've now received 50 raises from the companies in my FI Portfolio increasing my forward-12 month dividends by $608.62.

My FI Portfolio's forward-12 month dividends are $8,970.99  Including my FolioFirst portfolio's forward dividends of $178.34 brings my total taxable accounts dividends to $9,149.33.  My Roth IRA's forward 12-month dividends are $886.43.  My Rollover IRA's forward dividends are $4,000.02.  Across all accounts I can expect to receive $14,035.78 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.