A challenging year in the stock market has served as a good reminder that you want to hold some investments in companies with steady businesses. Dividend-paying companies can fit this bill because they must manage their capital well and have reliable cash flows.
Automatic Data Processing (NASDAQ: ADP), better known as ADP, is one unstoppable dividend stock that performed well for years across economic cycles. The company has grown its annual dividend payout for decades, and the stock can help you beat the Dow Jones Industrial Average in the process. Here’s why.
ADP’s consistent demand led in stellar returns for investors
ADP is a business that investors often overlook because what it does is somewhat boring. Before diving into the business, consider this: ADP has grown its dividend payout for 48 consecutive years. Another two years of increasing dividends will put it in the exclusive group of stocks known as Dividend Kings. Aside from the consistent dividend growth, it has been an excellent source of stock price appreciation, with the stock returning investors 611% over the last two decades (when reinvesting dividends), beating the Dow Jones Industrial Average’s total return of 431% in the same period.
ADP is a top stock because many companies turn to it for its solutions to human capital management (HCM). These solutions combine critical business functions, including human resources, payroll administration, talent management, time tracking, tax payments, and benefits administration.
Its reach is worldwide, with over 990,000 clients, paying 39 million workers across 140 countries and territories. What is truly impressive is that it processes payroll for over 25 million workers in the U.S. or one out of every six individuals. It has a reliable business model and is well positioned because of its technological solutions and wide knowledge of global regulations, so it can help clients no matter where they do business.
Why ADP could perform in an economic downturn
One concern investors may have about ADP is a potential slowdown in the economy and an uptick in unemployment rates. After all, four-in-five economists surveyed by Bloomberg News in early December said they believe we will see an economic downturn sometime in the next 24 months.
If unemployment ticks up, conventional wisdom is that ADP’s business would suffer, and they would make less revenue from payroll processing, tax, and benefits management. The opposite may come true. During a severe economic contraction, employers may seek to reduce overhead costs and outsource certain functions to ADP to save on administrative and compliance costs. Recent history supports this.
During the Great Recession, the unemployment rate in the United States jumped from 4.5% in 2007 to around 10% in early 2010. In that same period, ADP’s revenue grew 15% while its diluted earnings per share grew 31%. Investors who held ADP during this period were rewarded with a solid defensive stock that held up well, dropping by 30% from peak to trough, while the Dow Jones lost over 50%.
A solid income stock with market-beating potential
ADP is a steady business that performed well across different economic conditions and did so this last year as well. The stock is down about 1.6%, coming out ahead of the Dow Jones, which is down 6.5%, and the S&P 500, which is down 15.6% in the same period.
The company did a solid job of investing in technology to stay on top, and its cloud-based platform helps businesses stay in compliance with different regulations, which is why demand remained so consistent for years. The business isn’t terribly exciting, but its reliable cash flows give the business stability and capital management, and a history of growing dividends makes it a reliable investment. Its dividend yield of 1.82% makes ADP a solid pick for income investors looking to beat the Dow Jones.
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