When Automatic Data Processing Inc. (NYSE: ADP) announced on Thursday that it would spin off its dealer services business, it didn’t take long for the credit ratings agencies to swing into action. The separation will cost ADP around 15% of its revenue, and that was enough for both Moody’s Investors Services and Standard & Poor’s to lower ADP’s credit rating below the triple-A level.
Only three U.S. companies still retain the highest rating: Johnson & Johnson (NYSE: JNJ), Exxon Mobil Corp. (NYSE: XOM) and Microsoft Corp. (NASDAQ: MSFT). Moody’s and S&P both rate these as AAA or the equivalent. Fitch Ratings maintains its triple-A rating only on J&J.
ADP expects to realize a $700 million cash infusion from the spin-off and has said that it will use the cash to repurchase outstanding shares. That’s a nice one-off deal for investors, but it does little to enhance the company’s long-term value.
In making its decision, Moody’s said that ADP won’t be able to make up the lost revenue for at least two years. S&P said the downgrade narrows ADP’s business profile entirely to the highly competitive human capital management sector.
The difference between a triple-A rating and a double-A rating is probably not terribly meaningful to investors. For the companies, it is costly to maintain because it limits the amount of debt a firm can take on and, therefore, limits the company’s ability to make acquisitions or repurchase stock.
ADP stock closed Friday at $73.73, down $1.41 or 1.98%, in a 52-week range of $63.98 to $83.82.
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