Automatic data processing stock (NASDAQ:ADP) outperforms underlying earnings growth over past five years

When you buy a stock, there is always a chance that it will drop 100%. But on a lighter note, a good company can see its stock price soar well over 100%. A good example is Automatic Data Processing, Inc. (NASDAQ: ADP) which has seen its stock price climb 135% over five years. Shareholders also appreciated the 20% gain over the past three months.

Since it’s been a good week for Automatic Data Processing shareholders, let’s take a look at the trend in longer-term fundamentals.

Although the efficient markets hypothesis continues to be taught by some, it has been proven that markets are dynamic systems that are too reactive and that investors are not always rational. An imperfect but reasonable way to gauge changing sentiment around a company is to compare earnings per share (EPS) with the stock price.

In half a decade, Automatic Data Processing has managed to grow its earnings per share by 14% per year. This EPS growth is slower than the share price growth of 19% per year, over the same period. It is therefore fair to assume that the market has a better opinion of the company than five years ago. That’s not necessarily surprising given five years of earnings growth.

You can see how EPS has changed over time in the image below (click on the graph to see the exact values).

NasdaqGS: Growth in earnings per ADP share December 27, 2021

This free interactive report on automatic data processing profit, turnover and cash flow is a great place to start, if you want to investigate the stock further.

What about dividends?

It is important to consider the total shareholder return, as well as the stock price return, for a given stock. TSR is a calculation of return that takes into account the value of cash dividends (assuming any dividends received have been reinvested) and the calculated value of all discounted capital raisings and spinoffs. So for companies that pay a generous dividend, the TSR is often much higher than the stock price return. In this case, Automatic Data Processing’s TSR for the past 5 years was 162%, which exceeds the stock price return mentioned earlier. This is largely the result of its dividend payments!

A different perspective

It’s nice to see that Automatic Data Processing shareholders received a total shareholder return of 40% over the past year. Of course, this includes the dividend. As the one-year TSR is better than the five-year TSR (the latter standing at 21% per year), it seems that the stock’s performance has improved lately. At best, this may hint at genuine trading momentum, implying that now could be a great time to dig deeper. Most investors take the time to verify insider trading data. You can click here to see if insiders have bought or sold.

If you’re like me, then you not want to miss this free list of growing companies insiders are buying.

Please note that the market returns quoted in this article reflect the average market-weighted returns of stocks currently trading on US exchanges.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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