Last Update 12 Jan 26

ADP: Dividend And Buyback Support Will Offset Tougher Employment And Rate Backdrop

Analysts have trimmed their price targets for Automatic Data Processing to a range around $245 to $303, reflecting concerns that a tougher macro backdrop, slowing employment trends, and longer sales cycles could make it harder for the stock to support a premium P/E multiple despite recent solid quarterly results.

Analyst Commentary

Recent research updates show a more cautious stance around Automatic Data Processing, with trimmed price targets and a focus on how the company will handle a tougher backdrop for employment and interest rates.

Bullish Takeaways

Bullish analysts point to fiscal Q1 as a sign of solid execution, highlighting 7.1% revenue growth and 6.7% EPS growth as support for the current business model even as macro risks build.
Some see favorable underlying demand trends as a cushion for growth, suggesting ADP can still attract new clients and cross sell services despite longer sales cycles.
The updated targets, while lower, still sit well above current levels implied by a strict value view. This signals that analysts are not writing off ADP's ability to justify a premium P/E entirely.
Ongoing revenue and EPS expansion give analysts a basis to argue that execution is intact, and that any re rating pressure is more about the external setup than company specific missteps.

Bearish Takeaways

Bearish analysts argue that a tougher macro backdrop, including concerns about potentially rising unemployment and lower interest rates, makes it harder for payroll outsourcers to support premium P/E multiples.
Slowing employment trends and longer sales cycles are flagged as key risks, since they can weigh on volume growth and delay new contract wins, limiting upside to earnings estimates.
Initiation with an Underweight rating and a US$288 target reflects a view that the risk reward skew is less attractive at current levels, with cyclical headwinds seen as more influential than recent solid results.
The cut in price targets to a range around US$245 to US$303 highlights concern that, even with stable execution, valuation may need to compress if the macro setup stays challenging for this group.

What's in the News

ADP approved a $0.16 increase in the quarterly cash dividend to an annual rate of $6.80 per share, marking the 51st consecutive year of dividend raises. The new $1.70 quarterly dividend is payable on January 1, 2026, to shareholders of record on December 12, 2025 (Key Developments).
Between July 1, 2025, and September 30, 2025, ADP repurchased 1,218,350 shares, representing 0.3% of shares, for US$368.07m. This brings total repurchases under the November 9, 2022, program to 13,747,059 shares, or 3.35%, for US$3,554.76m (Key Developments).
ADP maintained its consolidated earnings guidance for fiscal 2026 and kept its consolidated revenue outlook for 5% to 6% growth (Key Developments).
ADP launched the Save4Retirement Pooled Employer Plan, a pooled 401(k) structure that lets multiple unrelated employers participate in a single plan. The plan includes embedded payroll and recordkeeping integration designed to keep payroll and participant data aligned in real time (Key Developments).
ADP announced a new integration with Thatch, an Individual Coverage Health Reimbursement Arrangement platform. The integration embeds ICHRA benefits directly into the RUN Powered by ADP payroll platform so small and mid-sized businesses can quote, enroll, sync payroll deductions and carrier payments, and offer employees a range of health, dental, and vision choices inside their existing workflow (Key Developments).

Valuation Changes

Fair Value: Model fair value remains unchanged at US$289.54, indicating no adjustment to the central valuation estimate.
Discount Rate: The discount rate has moved slightly, from 7.33% to 7.34%, representing a very small tweak to the required return used in the model.
Revenue Growth: The long term revenue growth assumption is effectively steady at 5.68%, the same as the prior 5.68%.
Profit Margin: The assumed net profit margin is almost unchanged, edging from 20.88% to 20.89%.
Future P/E: The future P/E assumption remains stable at 27.59x.

Enhanced AI-driven offerings and integration of acquisitions are improving margins, operational efficiency, and locking in higher per-user revenue through advanced HR solutions.
Broadening partnerships and international expansion are diversifying the client base and fueling recurring and long-term revenue growth across global and small business segments.
Intensifying competition, sales delays, and rising costs are restraining revenue growth and margin expansion, while acquisitions and investments may limit near-term earnings improvement.

Catalysts

About Automatic Data Processing

Engages in the provision of cloud-based human capital management (HCM) solutions worldwide.What are the underlying business or industry changes driving this perspective?

Adoption of Next Gen products (like Lyric HCM and Workforce Now Next Gen) and integration of acquisitions (e.g., WorkForce Software) are accelerating demand for advanced, cloud-based, and AI-driven HR solutions, directly locking in higher average revenue per user and supporting earnings growth through margin expansion.
Expansion of strategic partnerships (such as with Clover/Fiserv for embedded payroll and large system integrators for global solutions) is extending ADP's distribution reach in the growing small business and global multinational segments, boosting future topline revenue growth opportunities.
Ongoing investments in AI-driven automation (e.g., ADP Assist and proprietary agent development) are improving operational efficiency and reducing service costs; as these deployments mature, they are expected to deliver sustained net margin and earnings improvement over time.
Broader and more complex workforce management trends-including increased regulatory requirements, globalization, and digitization-are leading companies to outsource HR functions to providers with scale and trusted platforms, positioning ADP to capture an expanding addressable market and drive recurring revenue growth.
International expansion, especially into underpenetrated geographies like Japan, Saudi Arabia, and Mexico, is set to diversify ADP's client base and accelerate long-term revenue growth as businesses worldwide increasingly adopt outsourced and cloud-based HR solutions.

Automatic Data Processing Earnings and Revenue Growth

Automatic Data Processing Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

Analysts are assuming Automatic Data Processing's revenue will grow by 5.7% annually over the next 3 years.
Analysts assume that profit margins will increase from 19.8% today to 21.0% in 3 years time.
Analysts expect earnings to reach $5.1 billion (and earnings per share of $12.87) by about September 2028, up from $4.1 billion today. The analysts are largely in agreement about this estimate.
In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 30.6x on those 2028 earnings, up from 29.5x today. This future PE is greater than the current PE for the US Professional Services industry at 26.3x.
Analysts expect the number of shares outstanding to decline by 0.59% per year for the next 3 years.
To value all of this in today's terms, we will use a discount rate of 7.12%, as per the Simply Wall St company report.

Automatic Data Processing Future Earnings Per Share Growth

Risks

What could happen that would invalidate this narrative?

Growing competitive pressure in the HR technology space, including recent mergers among rivals and strong performance by SaaS-native competitors, may further compress ADP's pricing power and market share, potentially impacting future revenue growth and net margins.
The company's bookings growth in fiscal 2025 was below expectations, with large, complex deals facing longer sales cycles and delays, especially in international and HRO segments; persistent delays or pipeline aging could translate to fewer closed deals and weaker top-line revenue.
Slowing U.S. payroll growth and anticipated moderation in pay-per-control (PPC) metrics, combined with a forecasted decline in retention (10–30 basis points), may limit organic revenue expansion and put pressure on overall earnings growth.
Higher zero-margin pass-through revenues, particularly in the PEO segment (driven by health insurance inflation), are expected to outpace core revenue growth, leading to continued PEO margin contraction and weighing on consolidated profitability.
Ongoing investments and integration costs associated with acquisitions (such as WorkForce Software), as well as net investments in AI initiatives, may slow margin expansion, especially if operational efficiencies do not ramp as quickly as planned, thereby limiting near-term earnings growth.

Valuation

How have all the factors above been brought together to estimate a fair value?

The analysts have a consensus price target of $320.25 for Automatic Data Processing based on their expectations of its future earnings growth, profit margins and other risk factors.
In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $24.3 billion, earnings will come to $5.1 billion, and it would be trading on a PE ratio of 30.6x, assuming you use a discount rate of 7.1%.
Given the current share price of $297.24, the analyst price target of $320.25 is 7.2% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.

Have other thoughts on Automatic Data Processing?

Create your own narrative on this stock, and estimate its Fair Value using our Valuator tool.

Create Narrative

How well do narratives help inform your perspective?

Disclaimer

AnalystConsensusTarget is a tool utilizing a Large Language Model (LLM) that ingests data on consensus price targets, forecasted revenue and earnings figures, as well as the transcripts of earnings calls to produce qualitative analysis. The narratives produced by AnalystConsensusTarget are general in nature and are based solely on analyst data and publicly-available material published by the respective companies. These scenarios are not indicative of the company's future performance and are exploratory in nature. Simply Wall St has no position in the company(s) mentioned. Simply Wall St may provide the securities issuer or related entities with website advertising services for a fee, on an arm's length basis. These relationships have no impact on the way we conduct our business, the content we host, or how our content is served to users. The price targets and estimates used are consensus data, and do not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that AnalystConsensusTarget's analysis may not factor in the latest price-sensitive company announcements or qualitative material.

Long-Term Demand For HR Outsourcing Will Overcome Near-Term Macro Weakness