Automatic Data Processing
The compliant payroll tollbooth with decades of compounding power
Automatic Data Processing operates mission‑critical payroll and HCM platforms with multi‑decade client relationships, high switching costs, and scale advantages across 1.1 million clients in 140+ countries. Fiscal 2025 TTM results show $20.56 billion in revenue, a 25.8 percent EBIT margin, and disciplined execution despite a mixed macro backdrop.
The business is capital‑light, consistently converting earnings to cash and compounding through steady price/mix, retention, and measured M&A. Embedded compliance, brand trust, and efficient scale underpin a durable moat, while ADP’s float‑like “client funds” model benefits from interest earned on funds held for clients.
Interest on client funds was $1.189 billion in FY25 at an average 3.2 percent yield on $37.6 billion average balances, and management guides to modest uplift in FY26 as the portfolio re‑sets. Retention in Employer Services was 92.1 percent in FY25, reinforcing predictability.
Financial strength is excellent: long‑term debt of $4.0 billion is balanced by $3.35 billion of corporate cash plus $10.6 billion of committed credit facilities, and free cash flow of roughly $4.77 billion on minimal capex supports both reinvestment and shareholder returns.
With 50 consecutive years of dividend raises and consistent buybacks, capital allocation has been prudent. Our quality assessment is high; we would aim to own this business at or below a disciplined free cash flow multiple, as detailed below.
Does Automatic Data Processing have a strong competitive moat?
ADP’s moat is anchored in high switching costs, regulatory expertise, trusted brand, and efficient scale. Payroll and tax compliance are mission‑critical, error‑intolerant workflows; migrations risk penalties and employee trust, which discourages switching.
ADP serves 1.1 million clients and pays over 42 million workers globally, reinforcing brand and process scale. ES client revenue retention was 92.1 percent in FY25. Competitively, ADP faces cloud HCM vendors, PEOs, and in‑house systems, yet remains one of the largest global providers.
Risks to moat durability include rapid AI‑led UX improvements by insurgents and regulatory shifts, but ADP’s investment pace (Lyric, Assist) and compliance depth help defend share. Net: multiple moat layers with good durability.
Does Automatic Data Processing have pricing power in its industry?
Pricing is solid but not unconstrained. FY25 ES revenue growth reflected new business, strong retention, and an increase in pricing, alongside client funds interest and the WorkForce Software contribution. EBIT margin of 25.8 percent (26.0 percent adjusted) and consistent price/mix gains show healthy unit economics.
Still, competition in SMB/mid‑market and procurement discipline in enterprise cap ultimate pricing power. We see steady, measured price increases supported by value delivery and compliance risk mitigation, with add‑on modules as a lever.
How predictable is Automatic Data Processing's business?
Revenue is largely recurring, tied to payroll processing volumes, seat counts, and add‑ons. FY25 organic constant‑currency growth was 7 percent, with ES retention at 92.1 percent and PEO average worksite employees up 3 percent.
Macro exposure exists via employment levels and rates, since interest on client funds adds variability, but the core processing and compliance engine remains steady. Management’s FY26 outlook calls for 5–6 percent revenue growth and modest margin expansion, consistent with ADP’s long‑term profile.
Is Automatic Data Processing financially strong?
Balance sheet quality is high. As of June 30, 2025, ADP held $3.35 billion in corporate cash, maintained $10.6 billion in committed facilities, and had $3.97 billion of long‑term debt (laddered notes maturing 2028–2034). Client funds assets and obligations are matched and separate from corporate liquidity.
TTM operating cash flow was $4.94 billion, capex about $169 million, yielding FCF near $4.77 billion and robust coverage of dividends and buybacks. Low capital intensity and access to commercial paper support resilience.
How effective is Automatic Data Processing's capital allocation strategy?
ADP prioritizes organic investment (cloud, AI, data, compliance) and complements it with measured M&A, notably WorkForce Software in FY25. It returned $2.8 billion in 9M FY25 via dividends and buybacks; full‑year buybacks were about $1.28 billion with roughly 4.4 million shares repurchased, and the company marked its 50th consecutive annual dividend increase.
Capex is small (≈0.8 percent of revenue), and FCF conversion is strong, enabling reinvestment and returns while keeping leverage modest. Track record on acquisitions is conservative and generally supportive of the core.
Does Automatic Data Processing have high-quality management?
Leadership continuity is solid. Maria Black, a long‑tenured operator, became CEO in 2023 and is leaning into product modernization and AI (Assist, Lyric). Peter Hadley, previously Treasurer with deep knowledge of client funds and capital markets, became CFO effective July 1, 2025, providing experienced stewardship of the float and balance sheet.
Execution on FY25 targets and clear FY26 guidance reflect disciplined, shareholder‑minded management. Potential watch items include ongoing service experience in SMB/mid‑market and maintaining innovation velocity against next‑gen competitors.
Is Automatic Data Processing a quality company?
Automatic Data Processing is a good quality company with a quality score of 89/100
- Switching costs and regulatory complexity create a resilient moat; ES client revenue retention ran at 92.1 percent in FY25.
- Capital‑light model with FCF ≈ 4.77 billion on TTM basis; capex ≈ 0.8 percent of revenue.
- Interest on client funds adds a float‑like tailwind; FY25 average yield 3.2 percent on $37.6 billion balances.
- 50th consecutive year of dividend increases signals durable cash generation and discipline.
- Product breadth and AI features (ADP Assist, Lyric) plus the WorkForce Software acquisition support long‑term positioning across SMB to enterprise.
What is the fair value of Automatic Data Processing stock?
Is Automatic Data Processing a good investment at $267?
The following analysis is provided for informational and educational purposes only. It does not constitute financial advice, investment advice, or a recommendation to buy or sell any security. The opinions expressed are based on publicly available information and historical data. Beanvest and its contributors may hold positions in the securities mentioned. Investors should conduct their own due diligence or consult a licensed financial advisor before making any investment decision.