This Payroll 'Toll Collector' Keeps Rewarding Shareholders

When tough times hit, how will your portfolio perform?

To figure this out, you need to assess each position you hold. Which of your holdings will be immune to downturns, and which will be hit hard?

To determine your portfolio's strength, you could turn to philosophy...

According to trader and philosopher Nassim Taleb, everything can be put into three states: fragile, robust, and antifragile.

And investor and author Vitaliy Katsenelson extrapolated this to apply to individual companies. "Fragile" companies are those weighed down by loads of debt. If the economy goes into a recession and the company has to issue equity at low prices, it could destroy value. These companies come out of recessions weaker than when they entered.

"Robust" companies aren't hurt by recessions, according to Katsenelson. The value of the business remains roughly the same, and they emerge from the downturn as if nothing happened.

But "antifragile" businesses are the best of the bunch. These companies have strong businesses and fortress-like balance sheets. They're similar to the "Global Elite" businesses we've covered in previous posts of Stock of the Week.

When a recession hits, these companies are not only not hurt... they benefit. Many of their competitors will fall under either of the previous two categories. And since these antifragile businesses are so strong, they're able to take advantage of their competitors' weaknesses during hard times.

So, they actually come out of a recession stronger than when they went in.

Today, we're looking at one of the best "antifragile" businesses. And it also happens to be one of Stansberry Research's best-ever recommendations...

We're talking about Automatic Data Processing (Nasdaq: ADP). It's the largest payroll and tax-filing processor in North America, and one of the largest business-outsourcing companies in the world.

If you get a paycheck, the chances are good that ADP is the company that withholds your taxes, hands them to various government agencies, processes your check, and pays you. In total, it has about 547,000 customers across the globe.

Just like how Western Union charges a royalty on cash transfers around the globe, ADP charges a royalty on the movement of money from employers' pockets into employees' paychecks... and from there to insurance companies and tax collectors.

Whether it's people or money, when transportation is necessary, somebody has to build the road to accommodate the travelers. ADP is a toll road in the global financial system – collecting fees as money changes hands.

Aside from charging fees for payroll processing and tax-payment processing, ADP is able to make money simply by holding your tax payments long enough to earn interest on them.

Think about millions of workers, getting a paycheck every week or two. ADP gets a piece of that action and collects interest on the tax money every time.

Longtime Stansberry Research readers will recognize the similarities between this and the "float" an insurance company gets to hold. In short, float is premiums collected but not yet paid by an insurer. The insurance company gets to hold this money and collect interest on it before paying it out in claims.

It's one of the reasons we love insurance companies... And ADP gets the same advantage.

In its 2019 fiscal year, the company earned $562 million of interest by using this model. That's a 20% growth rate from 2018.

And while this is a great addition to the business, it only accounts for about 4% of ADP's sales.

ADP's payroll and outsourcing businesses make up the rest of its $14 billion in sales. ADP has an elite business that shouldn't be hurt by the same things as other companies. While higher wages and higher interest rates might hurt a lot of businesses, they'd be great for ADP's earning power.

ADP's businesses gush cash flow, too. Of the $14 billion in sales, $2.5 billion trickles down to free cash flow ("FCF").

Remember, FCF is simply a measure of a company's cash profits minus capital expenditures ("capex"). This is the one metric we value most at Stansberry Research.

So, for every $1 ADP makes in sales, nearly $0.18 flows directly to FCF. That's an incredible return. Most large companies would be lucky to generate half of that.

With so much FCF, ADP can afford to reward its shareholders. In the past 12 months, it paid out more than $1.2 billion in dividends... And it bought back more than $800 million worth of its own shares.

It should continue to return tons of capital to shareholders, if history tells us anything. The company has increased its dividend payout for 44 straight years, making it one of the few "Dividend Aristocrats."

ADP has a great balance sheet and business, but its price action is just as impressive.

Over the past five years, ADP's stock has more than doubled. And so far in 2019, ADP is up more than 25%. For comparison, the S&P 500 Index has only returned around 15%.

Sometimes investing is simple.