Three-Tier Business Strategy Aids ADP Amid Intense Competition

ADP ADP stock has gained 10.8% in the year-to-date period, outperforming the industry and the Zacks S&P 500 composite’s 6.7% and 0.8% growth, respectively.

ADP reported impressive third-quarter fiscal 2025 results. ADP’s earnings per share of $3.06 beat the consensus estimate by 3.4% and increased 6.3% from the year-ago quarter. Total revenues of $5.6 billion surpassed the consensus estimate by 1.1% and grew 5.7% on a year-over-year basis.

How is ADP Faring?

As a human capital management technology (“HCM”) and service provider, ADP utilizes its three-tier business strategy to retain and expand its footprint. The company is committed to delivering a holistic suite of cloud-based HCM and HR outsourcing (“HRO”) solutions. It is expanding its international HCM and HRO businesses with established local, indigenous software solutions and cloud-based multi-country solutions.

ADP leverages its transformation initiative to accelerate DataCloud penetration and boost investment in inside sales, mid-market migrations and service alignment initiatives. The transformation initiative enables the company to innovate, enhance operations and expand margins.

ADP is an essential stock for dividend-seeking investors. In 2022, the company paid out $1.7 billion in dividends, which increased to $1.9 billion in 2023 and $2.2 billion in 2024. This strategy emphasizes the company’s commitment to returning value to shareholders and underscores its business confidence. As we anticipate steady income growth in the coming years, we also place an optimistic bet on ADP’s ability to pay out consistent dividends.

The company’s current ratio at the end of the third quarter of fiscal 2025 was 1.02, which is substantially lower than the industry average of 2.38. Despite falling behind the industry standard, ADP holds a current ratio greater than 1, indicating its ability to pay off short-term obligations effectively.

Furthermore, ADP faces significant competition in each of its product lines. Both its Employer services and PEO services segments compete with other independent business outsourcing companies in most of their operating regions. The surge in competition and migration from the legacy business has posed a negative impact on ADP’s retention rate.

The problem has bled into its talent management. The outsourcing industry is labor-intensive and highly foreign talent-dependent. To navigate through this rising competition, ADP must seek to hire more individuals, leading to rising talent costs and lowering the industry’s growth.

Zacks Rank & Stocks to Consider

ADP has a Zacks Rank #3 (Hold) at present.

Some better-ranked stocks in the broader Zacks Computer and Technology sector are Pitney Bowes PBI and Teradata TDC.

Pitney Bowes has a Zacks Rank of 2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

PBI has a long-term earnings growth expectation of 15%. It delivered a trailing four-quarter earnings surprise of 82.4%, on average.

Teradata currently carries a Zacks Rank of 2.

TDC has a long-term earnings growth expectation of 2.4%. It delivered a trailing four-quarter earnings surprise of 24.6%, on average.

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This article originally published on Zacks Investment Research (zacks.com).

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