Pat McKeough responds to many personal questions on specific stocks and other investment topics from the members of his Inner Circle. Every week, his comments and recommendations on the most intriguing questions of the past week go out to all Inner Circle members. And each week, we offer you one of the highlights from these Q&A sessions.

Inner Circle members often ask us about dividend stocks In this case, Pat responds to a question about a U.S. company that provides business outsourcing services to a wide variety of clients and is counting on strategic acquisitions and an improving employment rate to keep its dividend rising.

Q: Pat: Can I have your recommendation on Automatic Data Processing? Thanks.

A: Automatic Data Processing, (symbol ADP on New York; www.adp.com), is one of the world’s largest providers of business outsourcing services.

ADP has about 570,000 customers. It gets 70% of its revenue from its Employer Services unit, which provides payroll and tax services; the Professional Employer Organization unit (16% of total revenue) provides human resources services to smaller companies; and the Services unit (14%) provides auto and truck dealerships with accounting, inventory and leasing services. It also orders replacement parts.

The company continues to report improving results. In the three months ended March 31, 2012, its revenue rose 6.8%, to $2.9 billion from $2.7 billion a year earlier. Earnings rose 6.7%, to $452.4 million from $423.8 million. Earnings per share rose at a faster pace of 9.4%, to $0.93 from $0.85, on fewer shares outstanding. The company is doing a good job of retaining existing clients and attracting new ones.

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ADP makes key acquisition of employee benefits provider

ADP continues to buy back stock—in the last nine months it has repurchased about 8.9 million shares for $445 million.

The company plans to continue building its customer base through selective acquisitions. For example, it recently paid an undisclosed sum for the Human Resources Solutions business of SHPS Inc., a leading U.S. provider of employee benefits programs and benefits administration. These operations will add clients in the health care and insurance industries.

ADP holds cash of $1.7 billion, or $3.48 a share, and has almost no debt. It has regularly increased its dividend for nearly 30 years. The shares now yield 2.9%.

The company’s ability to keep raising its dividend, and the size of any increases, will depend on the unemployment rate. As unemployment drops and more people are added to the workforce, ADP benefits.

ADP’s stock trades at 20.2 times this year’s forecast earnings of $2.75 a share.

In the most recent Inner Circle Q&A, Pat examines how the outlook for the global economy is liable to affect the company’s near-term and long-term prospects and its ability to keep raising its dividend. He concludes with his clear buy-hold-sell advice on the stock.

(Note: If you are a current member of the Inner Circle, please click here to view Pat’s recommendation. Be sure to log in first.)

COMMENTS PLEASE

Does ADP seem expensive to you at 20.2 times this year’s earnings forecast? How much weight do you put on the fact that it has raised its dividend regularly for nearly 3 decades? Let us know what you think in the comments section below. Click here.