Recently the U.S. government reported that the U.S. has 501,000 fewer jobs than previously reported. To be precise, the Bureau of Labor Statistics politely calls this a “downward adjustment.”
Mind you, the jobs weren’t really lost. We never had them in the first place. The Labor Department, which is the government agency that’s in charge of telling us how many jobs there are, was off by half a million.
I find this staggering.
In what other field can you be off by that much and no one rally cares? It’s almost expected. Imagine if the officials in a football game didn’t know the score. Or worse. They told you that your team is up 28-10 when you’re actually trailing 21-0.
How does this even happen?
On the other hand, there’s a cynical side of me that’s fine with the government not knowing what it’s doing. I’m okay with the government being so inefficient or ever plain incompetent. It just means that whatever trouble they’re trying to stir up, then they’ll do a worse job of it. I apologize if that sounds unduly cynical, but these stories are as predictable as they are frustrating.
Unfortunately, folks in the business world aren’t accorded this degree of latitude. Don’t think I’m saying there aren’t boneheaded decision in the business world. Sure, there are plenty of them. I see it happen nearly every day.
But the key difference is that bad business decisions are held accountable. Even if the folks in charge aren’t fired, the negative effects are felt and eventually addressed. In the world government, agencies seem to live on forever.
There’s a hint of irony in that one of my favorite stocks is Automatic Data Processing (ADP). These are the people in charge of payrolls for so many firms across the country. ADP is so big in this field, that they issue their own jobs report each month. Economists give it the same care as official government report.
Payroll processing is a nice business to be in. It’s even nicer to be the dominant player (though there are strong competitors). The barriers to entry are high and the profit margins are generous. That’s exactly what you want to look for in a long-term investment.
So it’s no surprise that ADP’s stock has been amazing winner over the long term. Forty years ago, you could have picked up a share of ADP for a split-adjusted price of about 80 cents.
Today, the shares are going for about $170 a piece. Not too shabby. Add in reinvested dividends, and you’re up even more.
Today ADP has close to 60,000 employees and annual revenue of more than $14 billion. Until a few years ago, ADP was one of the few companies in the S&P 500 that had a coveted AAA rating. Even the U.S. government lost that!
A few weeks ago, ADP released another solid earnings report. For their fiscal Q4, ADP earned $1.14 per share. That beat estimates by a penny per share. Revenues came in at $3.5 billion which was a bit below expectations.
I was impressed by their guidance. For the current year (the fiscal year ends in June), ADP expects more good results. For sales growth, ADP projects an increase of 6% to 7%. The company also expects wider margins this year. That’s usually a good sign that business is going well. ADP expects earnings growth of 12% to 14% over last year’s results of $5.45 per share. That’s very good.
That means the company expects earnings this year of $6.10 to $6.21. If the earnings beats continue, it could be even higher.
ADP is also one of the rare Dividend Aristocrats. The company has increased its dividend every year for the last 43 years. There aren’t many companies like that.
Let’s do some math. The current quarterly dividend is 79 cents per share. Based on the recent share price, that works out to a dividend yield of 1.86%. That may not sound like a lot, but it’s higher than both the 10- and 20-year Treasury yields.
That’s not even a good comparison. There’s a reason the Treasury bonds are called “fixed income” because the coupon payments don’t change. ADP’s dividends, in contrast, have gone up and up for a few decades.
There’s another big difference between ADP and the government. I’m also pretty sure ADP has a good handle of their client count. I doubt they’re off by half a million.
I haven’t lost my faith in the government. Instead, it’s had a downward adjustment.
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