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Berko: ADP may be dull, but it’s a smart pick

By Malcolm Berko

Published: September 17, 2016, 6:03am

Dear Mr. Berko: What is your opinion of ADP LLC? The stock seems stuck at the same price it was a year ago. I’m 52. My portfolio is about 80 percent blue chip industrials and utilities, and I’d like a little more action. The company’s business seems boring, and I can’t imagine this stock being worth $200 in 10 years as my stockbroker believes it will be. My broker is bullish on ADP, and she’s pushing me (nicely) to buy 300 shares because it has “exceptional growth potential over the next decade.” I have plenty of cash, but I can’t see myself owning a company that does human resources business for other businesses. What do you think?

— L.J., Vancouver

Dear L.J.: Sometimes the best gifts come in small packages, and sometimes the best stocks are big companies involved in the most tedious, boring and unimaginative businesses. Buy ADP, and consider writing call options on your portfolio of blues for more excitement.

ADP (ADP-$86.67) is the world’s largest provider of human resources management and software services. The company — with 300 clients, 125 employees and $400,000 in revenues — went public in 1961 with a 100,000-share IPO at $3. Frank Lautenberg, who had become CEO of ADP in 1952 and quite wealthy, continued as chairman and CEO until elected to the U.S. Senate from New Jersey in 1982. By 1993, each $3 share had evolved into 144 shares, worth a total of $7,000. That’s just slow, not boring. Today, after several splits, that original share is worth about $94,000. That’s not boring, either.

At a glance, ADP seems to be among the most monotonous, uneventful and dull companies listed on the Big Board. But this year, ADP, with more than 610,000 clients, should report record revenues of $11.8 billion, report record share earnings of $3.25 and pay a record dividend of $2.12. Though new growth from payroll clients is slow, management has increased its customer base by 3 percent annually during the past decade. This was possible because 28 percent of ADP’s revenues now derive from overseas expansion, which was initiated 10 years ago. Today ADP does business in 111 countries, and overseas growth is expanding at 8 percent a year.

About 77 percent of ADP’s business derives from its handling of payroll and tax services and its aggressive professional employer organization, or PEO, division, which provides comprehensive HR solutions (for smaller companies), generates 23 percent of ADP’s revenues and is growing rapidly. What’s exciting about investing money in a company with 57,000 worldwide employees that cross-sells ancillary human resources services into its payroll processing base? And why should you invest in a company that depends on revenues from the implementation of the Affordable Care Act to boost profits from its core employer services segment? The answer is simple: steady double-digit revenue and profit potential because of the 80,000 new pages of risible, back-busting, business-inhibiting federal laws and regulations concocted by Congress and the executive branch each year. Given that, ADP’s PEO model becomes a company’s dedicated HR arm and benefits administration partner. Because ADP’s job is to understand the numerous quirky changes, it can effectively deliver a broad range of HR services through this co-employment model. And the resulting double-digit growth should ensure steady and long-term gains in revenues, earnings and dividends. Because the innumerable new HR regulations are becoming increasingly complex, PEO is becoming an increasingly profitable revenue growth provider.

Because you can handle a $28,000 investment, take your broker’s outstanding advice, which should generate substantial long-term principal appreciation. ADP’s $2.12 dividend yields a yucky 2.4 percent. But that dividend has increased in each of the past 40 years and has grown sixfold since 2000. ADP has a strong balance sheet, has only $200 million in debt and has spent over $1 billion in buybacks this year.

Malcolm Berko addresses questions about stocks. Reach him at P.O. Box 8303, Largo, FL 33775 or mjberko@yahoo.com.

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