Like Hips, Dividends – and Buybacks – Don’t Lie

Cramer’s breaking out his trusty Shakira theorem to explain aristocrat stocks – those companies that have increased their dividends every year for the past 25 years. Owning these kinds of stocks is like being born into old money: they keep paying you more every year to do nothing.

Sometimes dividends will lie, but not when they’ve been steadily increased every year for two and a half decades, Cramer says. Now, talking dividends isn’t as interesting as talking speculation, but they mean money in your pocket and provide a hedge against downside. This is why Cramer wants you in an aristocrat.

He was going to recommend Walgreen as an aristocrat pick, but he had to cut it because he thinks they will buy Express Scripts, which could put an end to dividend increases. He also had WW Grainger on his list, but he had to cut them too because the stock is just too cyclical.

That leaves ADP, Cramer’s number-one aristocrat. It’s a transaction-processing company that manages payroll, benefits and retirement services for employers. ADP also works with car dealers, helping to manage sales, accounting and inventory. It spun off its brokerage services division, which Cramer likes because it’s a tough business with lower margins than the others, he says.

Other than consistently high dividends, ADP’s got a big buyback, which is Cramer’s Sir-Mix-a-Lot corollary to the Shakira theorem. It’s also a company that puts out good numbers. They had strong client retention for the first two months of the current quarter, Cramer says, and its new bookings are in the double-digits. The payroll money that ADP holds grew 8.5% year-to-date, when the expectation was only 8%. This payroll money is important, Cramer says, because ADP invests it in securities while they hold it for their clients – a nice little extra source of income in addition to their fees.

And that’s just part of the equation. Because ADP spun off its weaker brokerage service division, it could show 12%-13% revenue growth instead of the 11% it would’ve had without the spinoff, Cramer says. ADP’s pre-tax margins could go 50 basis points higher, as well. None of this necessarily represents an improvement in the business, Cramer says – but when a company’s numbers are higher, you can be that the Street is paying attention.

But back to the buyback - the real reason ADP is Cramer’s favorite dividend aristocrat. ADP’s management plans on spending at least $750 million in the near term on buybacks, which Cramer thinks they were waiting to do until after the brokerage spinoff so they could buy the shares for less.

Bottom Line: Cramer is appointing ADP king of the aristocrats. It’s got a history of raising its dividend, it has the cash to raise it even further, the performance to back it up, and the buyback to boot.

Jim's charitable trust owns Express Scripts.

Questions? Comments?