Automatic Data Processing (
declined almost 2.0% ($1.49) to close at $73.73 on Apr 11, after
the company announced its plans to spin-off the Dealer Services
business into an independent publicly traded company. ADP expects
the spin-off to be completed in the early part of the fourth
quarter of 2014.
The 100% tax-free spin-off will help ADP to focus more on its
core Human Capital Management (HCM) business, going forward. Per
management, the strong long-term growth prospect of automotive
market will provide significant growth opportunities to the
Dealer Services business.
The transaction is expected to provide ADP at least $700.0
million, which it plans to use in buying back shares. ADP expects
to keep the current quarterly cash dividend of 48 cents per share
constant for the time being. Post the spin-off, the company
expects to eventually raise its dividend payout ratio to
Although the plan sounds shareholder-friendly, it did not go down
well with credit rating agencies. The Standard & Poor's
lowered ADP's credit rating from AAA to AA, primarily due to the
company's plan of using the proceeds to buy back shares.
Investor service decreased its rating to Aa1, citing lower scale
and variety of ADP's product portfolio.
The Dealer Services business segment provides marketing solutions
to over 26,000 auto retailers, distributors and manufacturers. In
the first six months of fiscal 2014, Dealer Services reported
revenues of $957.0 million, which increased 7.2% on a
year-over-year basis. On the other hand, Employer Services and
PEO Services increased 8.5% and 13.0% to $4.06 billion and $1.04
billion, respectively, during the same period.
For fiscal 2014, Employer Services revenues are expected to grow
approximately 7%, while PEO Services revenues are expected to
improve 12.0% to 13.0%. Dealer Services revenues are forecasted
to increase 8.0% on a year-over-year basis. Improving payroll
market remains a major positive for ADP, going forward.
We believe ADP's strong market position in the HCM will further
improve due to the spin-off, despite intensifying competition
from the likes of
Paychex Inc. (
Equifax Inc. (
. Moreover, aggressive share buyback will boost profitability,
going forward. However, the reduced scale of operations will hurt
results in the near term.
Currently, ADP has a Zacks Rank #3 (Hold).
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