Stock Analysis on Net
Stock Analysis on Net

Automatic Data Processing Inc. (NASDAQ:ADP)

This company has been moved to the archive! The financial data has not been updated since April 29, 2022.

Dividend Discount Model (DDM)

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In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Dividends are the cleanest and most straightforward measure of cash flow because these are clearly cash flows that go directly to the investor.

Intrinsic Stock Value (Valuation Summary)

Automatic Data Processing Inc., dividends per share (DPS) forecast

US$

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Year Value DPSt or Terminal value (TVt) Calculation Present value at 11.08%
0 DPS01 3.70
1 DPS1 4.31 = 3.70 × (1 + 16.44%) 3.88
2 DPS2 4.94 = 4.31 × (1 + 14.64%) 4.00
3 DPS3 5.57 = 4.94 × (1 + 12.83%) 4.07
4 DPS4 6.19 = 5.57 × (1 + 11.03%) 4.06
5 DPS5 6.76 = 6.19 × (1 + 9.23%) 4.00
5 Terminal value (TV5) 398.53 = 6.76 × (1 + 9.23%) ÷ (11.08% – 9.23%) 235.68
Intrinsic value of Automatic Data Processing Inc. common stock (per share) $255.68
Current share price $218.18

Based on: 10-K (reporting date: 2021-06-30).

1 DPS0 = Sum of the last year dividends per share of Automatic Data Processing Inc. common stock. See details »

Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.

Required Rate of Return (r)

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Assumptions
Rate of return on LT Treasury Composite1 RF 4.69%
Expected rate of return on market portfolio2 E(RM) 13.79%
Systematic risk of Automatic Data Processing Inc. common stock βADP 0.70
 
Required rate of return on Automatic Data Processing Inc. common stock3 rADP 11.08%

1 Unweighted average of bid yields on all outstanding fixed-coupon U.S. Treasury bonds neither due or callable in less than 10 years (risk-free rate of return proxy).

2 See details »

3 rADP = RF + βADP [E(RM) – RF]
= 4.69% + 0.70 [13.79% – 4.69%]
= 11.08%

Dividend Growth Rate (g)

Dividend growth rate (g) implied by PRAT model

Automatic Data Processing Inc., PRAT model

Microsoft Excel
Average Jun 30, 2021 Jun 30, 2020 Jun 30, 2019 Jun 30, 2018 Jun 30, 2017 Jun 30, 2016
Selected Financial Data (US$ in thousands)
Dividends 1,583,700 1,523,900 1,338,800 1,120,000 1,008,500 955,700
Net earnings 2,598,500 2,466,500 2,292,800 1,620,800 1,733,400 1,492,500
Revenues 15,005,400 14,589,800 14,175,200 13,325,800 12,379,800 11,667,800
Total assets 48,772,500 39,165,500 41,887,700 37,088,700 37,180,000 43,670,000
Stockholders’ equity 5,670,100 5,752,200 5,399,900 3,459,600 3,977,000 4,481,600
Financial Ratios
Retention rate1 0.39 0.38 0.42 0.31 0.42 0.36
Profit margin2 17.32% 16.91% 16.17% 12.16% 14.00% 12.79%
Asset turnover3 0.31 0.37 0.34 0.36 0.33 0.27
Financial leverage4 8.60 6.81 7.76 10.72 9.35 9.74
Averages
Retention rate 0.38
Profit margin 14.89%
Asset turnover 0.33
Financial leverage 8.83
 
Dividend growth rate (g)5 16.44%

Based on: 10-K (reporting date: 2021-06-30), 10-K (reporting date: 2020-06-30), 10-K (reporting date: 2019-06-30), 10-K (reporting date: 2018-06-30), 10-K (reporting date: 2017-06-30), 10-K (reporting date: 2016-06-30).

2021 Calculations

1 Retention rate = (Net earnings – Dividends) ÷ Net earnings
= (2,598,500 – 1,583,700) ÷ 2,598,500
= 0.39

2 Profit margin = 100 × Net earnings ÷ Revenues
= 100 × 2,598,500 ÷ 15,005,400
= 17.32%

3 Asset turnover = Revenues ÷ Total assets
= 15,005,400 ÷ 48,772,500
= 0.31

4 Financial leverage = Total assets ÷ Stockholders’ equity
= 48,772,500 ÷ 5,670,100
= 8.60

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.38 × 14.89% × 0.33 × 8.83
= 16.44%

Dividend growth rate (g) implied by Gordon growth model

g = 100 × (P0 × r – D0) ÷ (P0 + D0)
= 100 × ($218.18 × 11.08% – $3.70) ÷ ($218.18 + $3.70)
= 9.23%

where:
P0 = current price of share of Automatic Data Processing Inc. common stock
D0 = the last year dividends per share of Automatic Data Processing Inc. common stock
r = required rate of return on Automatic Data Processing Inc. common stock

Dividend growth rate (g) forecast

Automatic Data Processing Inc., H-model

Microsoft Excel
Year Value gt
1 g1 16.44%
2 g2 14.64%
3 g3 12.83%
4 g4 11.03%
5 and thereafter g5 9.23%

where:
g1 is implied by PRAT model
g5 is implied by Gordon growth model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5 – g1) × (2 – 1) ÷ (5 – 1)
= 16.44% + (9.23% – 16.44%) × (2 – 1) ÷ (5 – 1)
= 14.64%

g3 = g1 + (g5 – g1) × (3 – 1) ÷ (5 – 1)
= 16.44% + (9.23% – 16.44%) × (3 – 1) ÷ (5 – 1)
= 12.83%

g4 = g1 + (g5 – g1) × (4 – 1) ÷ (5 – 1)
= 16.44% + (9.23% – 16.44%) × (4 – 1) ÷ (5 – 1)
= 11.03%