A Sleeper Investment

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? Any recommendations? — LJ, Vancouver, Wash.

Dear LJ: 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 (health care, pensions, workers’ rights, etc.) are becoming increasingly complex, PEO is becoming an increasingly profitable revenue growth provider. And most small businesses can’t afford to staff an expert HR department.

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. This broker sounds like a good gal, and she has given you excellent advice. It’s my observation that distaff brokers give better investment counsel than their male counterparts.

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at mjberko@yahoo.com. To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.

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Drew Limsky joined Lifestyle Media Group in August 2020 as Editor-in-Chief of South Florida Business & Wealth. His first issue of SFBW, October 2020, heralded a reimagined structure, with new content categories and a slew of fresh visual themes. “As sort of a cross between Forbes and Robb Report, with a dash of GQ and Vogue,” Limsky says, “SFBW reflects South Florida’s increasingly sophisticated and dynamic business and cultural landscape.”

Limsky, an avid traveler, swimmer and film buff who holds a law degree and Ph.D. from New York University, likes to say, “I’m a doctor, but I can’t operate—except on your brand.” He wrote his dissertation on the nonfiction work of Joan Didion. Prior to that, Limsky received his B.A. in English, summa cum laude, from Emory University and earned his M.A. in literature at American University in connection with a Masters Scholar Award fellowship.

Limsky came to SFBW at the apex of a storied career in journalism and publishing that includes six previous lead editorial roles, including for some of the world’s best-known brands. He served as global editor-in-chief of Lexus magazine, founding editor-in-chief of custom lifestyle magazines for Cadillac and Holland America Line, and was the founding editor-in-chief of Modern Luxury Interiors South Florida. He also was the executive editor for B2B magazines for Acura and Honda Financial Services, and he served as travel editor for Conde Nast. Magazines under Limsky’s editorship have garnered more than 75 industry awards.

He has also written for many of the country’s top newspapers and magazines, including The New York Times, Washington Post, Los Angeles Times, Miami Herald, Boston Globe, USA Today, Worth, Robb Report, Afar, Time Out New York, National Geographic Traveler, Men’s Journal, Ritz-Carlton, Elite Traveler, Florida Design, Metropolis and Architectural Digest Mexico. His other clients have included Four Seasons, Acqualina Resort & Residences, Yahoo!, American Airlines, Wynn, Douglas Elliman and Corcoran. As an adjunct assistant professor, Limsky has taught journalism, film and creative writing at the City University of New York, Pace University, American University and other colleges.