Automatic Data Processing

Time to run payroll with ADP!

Just between us: do you enjoy doing your paperwork? I have to admit that small piles tend to build up at my place, which I then work through once a month. Of course, I check beforehand whether any urgent bills are due or whether there's anything I need to respond to more quickly. But basically it's always an "annoying" task for me too. Now imagine you're self-employed and have built a team of several employees. Calculating salaries and paying them on time, handling business trips and taking care of tax matters adds a whole lot more paperwork on top. Of course, you could hire more employees who would deal with nothing but that, or you could bring in a company that specializes in these tasks.

Automatic Data Processing Inc. is exactly that kind of company, and with well over 800 thousand business clients worldwide by now, it's the most successful in its industry. But it's not just bosses who are extremely satisfied, the shareholders are too.

The origins and business model of Automatic Data Processing Inc.

We owe the company's existence to Henry Taub. He was born in New Jersey in 1927 and attended Eastside High School there. He then went on to study accounting at New York University. Since he wasn't yet 21 in 1947 and therefore not yet allowed to take the CPA exam, Taub worked on the side for an accountant in Manhattan. When an employee who handled the staff payroll fell ill and was out for an extended period, Taub had to step in. However, dealing with all that paperwork was no easy task. On top of that, the employees who had been waiting for their pay for a while were understandably angry. Taub quickly realized that this monthly work was a big problem, especially for smaller employers. Things like social security or income tax required painstaking upkeep of various records. Without further ado, Taub decided to found Automatic Payroll Inc. in 1949.

He rented an office in Paterson (New Jersey) and started doing payroll for smaller companies. He took the streetcar to the client, picked up the employees' time sheets, did the paperwork in his office and brought back the finished payroll. At that time, it was still left to employers to sign the checks and hand the cash to employees in pay envelopes. As word of Automatic Payroll Inc.'s careful work quickly spread, more and more clients came on board. To support him, Henry's brother Joe Taub joined the company in 1951 and took over administrative tasks there. In the same building there was also a Prudential insurance office where Frank Lautenberg worked. During the occasional coffee break they got to know each other, and so the 3 became friends. In the evenings Lautenberg held insurance meetings with clients, and during the day he promoted Taub's service. After a while he joined the company full-time too, and together they kept expanding it. In 1957 they bought an IBM computer to offer their clients various data processing services. When the company went public in 1961, it renamed itself Automatic Data Processing Inc. (ADP for short).

Today ADP is the largest service provider for everything HR-related - from payroll, time tracking, travel expense management and tax matters all the way to the hiring process. Globally, though, there's still enormous growth potential. Currently, more than 80% of revenue is earned in its home country, America.

What does the future hold for ADP?

Basically, the answer here can be fairly short: the world population is growing, more and more people are working, ADP is getting more and more clients and tasks and keeps growing accordingly. There are already more than 810,000 business clients from 140 countries for whom ADP produces 41 million paychecks every month - and the number is rising. Besides the agreed service fees, ADP also benefits from interest income. The money it pays out to employees on behalf of employers sits in ADP's accounts for a short time. Even though there's hardly any interest at the moment, this added up to a total of 562 million US dollars in fiscal year 2019 (which ended in June) (see page 2 of the ADP 4Q19 Earnings Release). That figure rose 20 percent compared to the previous year.

Another topic that's increasingly moving to the forefront at ADP is cloud-based software applications for its clients that let them manage their employees easily and without hassle. The size of the company and the different types of employment shouldn't matter - whether someone works full-time or is a freelancer for the company, everyone should be easy to manage. ADP is also increasingly working with artificial intelligence. So it may well be that one day you'll be sitting across from a robot in a job interview.

What about the dividend?

Shareholders have been receiving a dividend since 1974, and it has been raised every year since then. Looking at the average dividend growth rate over the last 10 years, you get a solid figure of over 11 percent. The current dividend yield of 1.9 percent isn't particularly high, but with such an admirable share price performance it's more than bearable. At around 60 percent, the payout ratio is already a bit high, but ADP also doesn't have to invest a lot to stay competitive. Other industries definitely have a harder time here ...

Conclusion:
ADP takes a lot of paperwork off companies' hands so they can focus on their core business again. Most business clients are based in the home market, the USA, but since the company wants to become more and more independent of the country's economic health, it's currently growing increasingly abroad. This offers ADP enormous growth potential. Personally, I'm not a fan of paperwork at all, but I am a fan of the stock.