1 Magnificent Dividend Stock Down 35% to Buy and Hold Forever

Over the past year, a double whammy of headwinds has hit Automatic Data Processing (NASDAQ: ADP), better known as ADP. First, concerns about the sluggish employment market have continued to pressure the payroll processor and HR software provider's shares.

More recently, ADP has sold off due to fears that generative artificial intelligence (AI) will hurt the business. Much as with enterprise software stocks, investors are worried that mass adoption of AI will bode poorly for ADP's business model.

Add in additional concerns, and it's easy to see why shares are down by more than 35% from their 52-week high.

Yet while there may be substance to all this fear and uncertainty, it's possible that investors have overreacted, creating an interesting buying opportunity with this blue chip dividend stock.

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From concern to overreaction

It's not out of line for ADP investors to worry about sluggish growth and/or the impact of mass AI adoption on this company's fiscal performance going forward. Well over 60% of ADP's revenue still comes from its bread-and-butter payroll processing business, so nationwide employee numbers do directly affect how well this segment performs.

These same risks could arguably affect ADP's cloud-based human resources management and professional employer organization services business as well. However, these market fears are in stark contrast to forecasts.

Last July, when ADP first released guidance for the fiscal year ending June 30, 2025, its forecast of 5% to 6% revenue growth fell slightly short of expectations. However, management recently upped its full-year forecast and now anticipates sales growth to come in near the top end of its initial forecast.

Analysts have, in turn, upped their own forecasts, anticipating revenue growth of 6.02% this fiscal year. As for earnings growth, management believes adjusted EPS will rise 8% to 10% this year, in large part due to rising margins with its non-payroll business lines. Sell-side forecasts call for earnings growth of around 9.5%, in line with management's outlook.

The long-term silver lining with ADP

Looking ahead to the next fiscal year, analyst forecasts call for growth in line with this year's projections. For the fiscal year ending June 30, 2027, analysts anticipate 5.7% sales growth and 9% earnings growth. Alongside factors like improved margins in ADP's non-payroll business, the company's $6 billion share repurchase plan stands to provide a further earnings growth boost.

The prospect of steady growth bodes well for ADP investors in two ways. First, consistent growth suggests ADP will stay one of the Dividend Kings, which are dividend stocks that have at least 50 consecutive years of dividend growth; ADP has increased its dividend 51 years in a row. The latest dividend increase, 10.3%, was last November.

Over the past decade, ADP's dividend growth has averaged around 12.2%. Currently, the stock has a forward dividend yield of 3.3%. Alongside this steady return, shares could experience even greater price appreciation once these worries subside.

Following the pullback, ADP trades for less than 20 times estimated FY2026 earnings. Historically, the stock has traded for around 25 times forward earnings. Add it up, and it's easy to see how long-term investors could profit from ADP's short-term volatility.

Thomas Niel has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.