How Safe Is ADP's Dividend?

Dividend investors like consistency, and Automatic Data Processing (NASDAQ: ADP) has done a good job of treating shareholders well over its long history. The payroll services giant has delivered solid long-term returns and has also built up an impressive track record of boosting its dividends year in and year out, regardless of business conditions. More recently, though, activist investors have been critical of ADP, believing that a transformation in the business is necessary in order for it to meet its full potential going forward. The company itself isn't so certain, but that hasn't entirely reassured some shareholders who fear that future potential challenges could put an end to dividend growth.

Dividend stats on ADP

Dividend yield

ADP has a dividend yield of 2.1%, which just barely puts it ahead of the current yield for the S&P 500 as a whole. That yield isn't so high as to be troubling in itself, but it has come down substantially in recent years. Throughout the past decade, ADP's yield has ranged as high as nearly 4%, with 2% being the recent floor. Yet the reason for the low recent yield is a good one: The stock has climbed to all-time highs, doing so at a fast enough clip to outpace ADP's dividend growth.

Payout ratio

ADP's current payout ratio is close to 60%, which is solidly within its typical range. Throughout most of the past 10 years, Automatic Data Processing has paid out between 50% and 65% of its earnings in the form of dividends. A brief pause in earnings growth during 2014 and early 2015 led to a temporary increase in the figure, but the recent earnings rebound has brought ADP's payout ratio back down to more comfortable levels.

Dividend growth

ADP has managed to grow its dividend consistently over the decades. The company qualifies as a Dividend Aristocrat given its 42-year streak of consecutive annual dividend increases, the most recent of which it made in late 2016. ADP hasn't been afraid to modify the rate of dividend growth from time to time, making only small increases during tough times while boosting growth levels during more prosperous periods, but its most recent increase of nearly 8% was healthy and representative of past moves.

What's happened with ADP lately?

ADP has gone through some perturbations recently, with the participation of Bill Ackman making the stock increasingly volatile. During July, ADP posted solid gains in its share price following the results of its fiscal fourth-quarter financial report. The company saw sales gain 6% overall on a strong 7% organic growth performance, but earnings were down slightly on a continuing basis from year-ago levels. Subsequently, investors reacted favorably to news that Ackman's Pershing Square Capital Management hedge fund had picked up an 8% stake in ADP. Ackman has aggressively sought a change in leadership in order to get more value from the stock, but ADP has thus far fought those attempts.

August wasn't as kind to ADP shares, which gave up some of their gains from the previous month. The battle between the company and Ackman failed to make any substantial progress toward reaching a resolution, and shareholders contented themselves with the idea that the issue would at least find a conclusion when the company has its annual shareholder meeting in early November. Yet the uncertainty between now and then could lead to further dramatic moves both up and down for the stock. Moreover, depending on what happens with the dispute, ADP could find itself having to make changes to its capital allocation strategy in order to match up with broader strategic vision.

What to expect from ADP

That said, Ackman has little reason to be displeased with ADP's dividend being too high, and a common theme he has followed with other companies has been to argue in favor of greater dividends. In any event, ADP's business is healthy enough to sustain its dividend now and well into the future, barring any unforeseen transformative events in the near term.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool recommends Automatic Data Processing. The Motley Fool has a disclosure policy.