Automatic Data Processing is making big profits from organising offices – should you invest?

Automatic Data Processing. (ADP) is a global technology company worth $123 billion and the world leader in human capital management. The software group boasts several desirable features for investors, offering them enduring competitive advantages, a share price up 119% in five years and a 2% yield from a dividend that has been increased every year for 50 years.

The group’s share buybacks have reduced the share count by an average of 1% per year over the past 10 years. ADP’s medium-term target is an annual total shareholder return of 13%-15%, with 2% of this figure from the dividend and 1% from the reduction in the share count.

For more than 75 years ADP has been helping small, medium-sized and large businesses by providing efficient services such as payroll and tax administration; time and attendance management; benefits management (retirement plans, health insurance); HR outsourcing (HRO); and complete human capital management (HCM).

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The last includes processes ranging from recruitment and training to performance management. All the group’s services are now cloud-based.

ADP has 1.1 million payroll clients from a wide range of business sectors and pays more than 42 million employees across 140 countries.

In the US, its software consistently serves one-sixth of all employees. US non-farm employment has been increasing month by month in 2025, with payrolls up by 1.06 million between January to July, so ADP’s largest market is still growing.

For every one of the past 18 years, ADP has been listed in Fortune magazine’s ranking of the world’s 1,000 most-admired companies and was placed within the top quartile in 2024. Over the past 10 years, ADP’s revenue has increased by 88% and it has returned $30 billion to shareholders.

How Automatic Data Processing is fending off rivals

ADP’s enduring competitive advantage over rivals – its “moat” – is based on switching costs, intangible assets and scale. For a customer to switch to another company would be an expensive hassle because of the potential disruption of payrolls and possible loss of data. This is reflected in ADP’s 92% client retention.

Intangible assets include ADP’s strong and trusted reputation in payroll, its record of maintaining the highest levels of data security and privacy, and its deep understanding of the many regulations surrounding compliance and taxes around the world.

Scale benefits derive from ADP being the largest payroll provider in the US and the leader in mid-market HCM. ADP’s 2025 revenue was $20.6 billion, only 11.8% of the total potential market of $175 billion. The market is expected to grow at 5%-6% per year from 2025 onwards, with ADP’s medium-term strategy aiming for 7%-8% annual sales growth.

Growth will be a mixture of organic expansion and acquisitions. Organic growth is driven by this year’s $1 billion investment in research and development, digital transformation and artificial intelligence. Acquisitions are chosen to add strategic value. ADP has two business segments: Employer Services (ES) and Professional Employer Organisation services (PEO). ES’s revenue is twice PEO’s. ES provides human capital management and à la carte human resources outsourcing, whereas in PEO, ADP acts as a co-employer, with its smaller business customers providing a comprehensive HRO solution.

This has advantages, since ADP can combine several firms’ needs to negotiate keener prices on benefits and healthcare for its customers. ADP also has a third source of revenue – the interest on customers’ cash balances.

Growth should come from rising employment, cross-selling to increase revenue per customer, gains in market share, increasing interest from higher customer cash balances, and bolt-on acquisitions.

Automatic Data Processing: steady growth and rising income

ADP’s results for the year to 30 June 2025 showed revenue up 7% to $20.6 billion, adjusted earnings before interest and tax (Ebit) up 9% to $5.3 billion and adjusted diluted earnings per share (EPS) up 9% to $10.01.

The balance sheet showed long-term debt of $3.97 billion, with 84% of it matched by cash of $3.35 billion. Funds held for clients came to $30.9 billion, on which ADP earned interest of $1.2 billion (up 16% from the year before). The Employer Services (ES) division recorded revenues of $13.88 billion with a margin of 36.1%, while the Professional Employer Organisation (PEO) services division had revenues of $6.69 billion, with a margin of 14.2%.

ADP is using generative AI in supporting service associates, driving implementation efficiencies and in ADP Assist, launched in 2024. This is an AI-powered cross-platform solution to provide next-generation payroll and HCM solutions. In 2025, ADP launched Lyric, which is its new global HCM platform. The company’s guidance for full year 2026 comprises revenue growth of 5%-6%, an increase of 50-70 basis points in the adjusted operating margin and diluted EPS growth of 8%-10%.

ADP’s (Nasdaq: ADP) recent share price of $305 implies a forward price/earnings (p/e) ratio of 27.9 with a forward dividend yield of 2%. Analysts have pencilled in an EPS estimate of $13.05 for 2028, giving a p/e of 23.4.

ADP’s shares have gained 294% over 10 years, 119% over five years and 16% over one. ADP’s strong position in its sector, wide moat, high customer retention and continuous development of its products enable it to generate steady, profitable growth and a reliable dividend (raised every year for the last 50), making it a sound long-term investment.

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