I first learnt of Automatic Data Processing Inc (ADP) from my studies of FundSmith, a UK-based fund managed by Terry Smith a.k.a England’s Warren Buffett. From it, I’ve discovered ADP to be a leading cloud-based human capital management (HCM) solutions company that serves clients of all sizes and kinds, ranging from small to large enterprises, in 140+ nations worldwide. Here, I would make a list of 5 main points that I learnt of ADP after studying its annual reports. They are as follows:
1. ADP Delivers Payroll to 1 in every 6 Workers in the US.
In 2024, ADP pays 26+ million workers in the United States and 15+ million workers outside the US. In addition, ADP can prepare and file federal, state and local payroll tax returns, and annual Social Security, Medicare, and federal, state and local income tax withholding reports. In 2024, it processed and delivered US$ 3.1+ trillion of payroll and taxes on behalf of its clients. Apart from payroll and taxes, ADP offers multiple solutions that improve talent acquisition, time, benefit and workforce management to its clients.
2. EPS Grew at a CAGR of 13.44% in the last 10 Years.
ADP grew its earnings per share (EPS) at a CAGR of 13.44% for the last 10 years, up from US$ 2.59 in 2013 to US$ 9.14 in 2023. This is contributed by several factors. First, ADP had reported higher total revenues from US$ 10.2 billion in 2013 to US$ 19.2 billion in 2023. Second, its profit margin improved from 12.2% in 2013 to 19.5% in 2023. This contributed to ADP’s increase in its net income from US$ 1.24 billion in 2013 to US$ 3.75 billion in 2023. Third, ADP had reduced its number of shares from 478.9 million in 2013 to 410.6 million in 2023 as it had been continuously undertaking share buybacks during the 10-year period.
3. 83% of ADP’s Cash Inflows Spent on Share Buybacks and Dividends.
In 2015-2024, ADP generated US$ 31.7 billion in cash inflows. Of which, US$ 28.8 billion (91%) was generated from its operating cash flows. The balance of US$ 3.0 billion (9%) was funded by debt. From the US$ 31.7 billion, ADP spent US$ 14.0 billion (45%) and US$ 11.8 billion (38%) in share buybacks and dividend payments over the 10-year period. The balance of its cash inflows (17%) was spent on purchases of intangible assets, capital expenditure & business acquisitions.
4. Transformation with Generative AI and Machine-Learning
In 2024, ADP served 1.1+ million clients spanning 140+ countries and 42+ million wage earners. This translates to ADP’s large and deep set of data. ADP revealed several main initiatives which include ADP Assist, a cross-platform solution powered by AI that offers an array of HR solutions, which include payroll, time, talents, benefits, recruitment, analytics, reporting and compliance. In the United States, ADP DataCloud’s Skills Graph can provide HR insights based on its database like 44+ million employee records, 140+ million resumes and 11+ million job postings.
5. Valuation Ratios
In 2015-2024, ADP’s P/E Ratio averages at 28.68, P/OCF averages at 23.67, and dividend yield averages at 2.12% per annum. In that 10-year period, ADP’s total return amounts to about 13%, which consists of capital growth of 11+% and 2+% in dividend yield. Its capital growth of 11+% is attributed mainly from ADP’s EPS 10-Year CAGR of 13.34% and a mild reduction in P/E Ratio in 2024 at 25.8 as compared to P/E Ratio in 2014 at 28.6. Thus, ADP’s total return is mainly driven by EPS Growth, which is driven by its growth in revenue and margins and a reduction in number of shares during the period.
Conclusion:
Overall, ADP delivered consistent growth in revenues, margins, net income, EPS, and operating cash flows for the last 10 years. This had contributed the bulk of its total return in 2015-2024. As an investor, the key is to calculate ADP’s current valuation ratios and compare them with its past historical ratios and as well as other US listed stocks before making an investment decision.
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