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Ex-Dividend Wars (Revisited): Home Loan Servicing vs. Hickory Tech

Almost a year ago to the day, we pitted two high-yieldersHome Loan Servicing Solutions (HLSS) and Hickory Tech Corp. (HTCO) – against one another in a good old-fashioned stock war.

What’s that, you say?

It’s when we pick two companies that share a common fundamental – in this case, an attractive yield. Then, we conduct a fundamental comparison of each company.

We don’t leave anything to chance or subjectivity, either. Instead, we keep the ground rules the same every time. No matter what type of company we’re analyzing.

Specifically, we use our seven guiding principles of dividend investing – plus one more important fundamental – to determine the most compelling income investment.

Our mission is to ensure that we’re always investing in the dividend champs, not chumps.

Last time around, we declared HLSS the ultimate winner. That proved to be the right call.

Shares of HLSS are up 26% since then, compared to a 6.5% rise for HTCO.

If we include dividend payments, it looks even more lopsided. HLSS’ total return checks in at 35.4% versus just 11.9% for HTCO.

It’s time for a rematch, though.

After all, investment opportunities change over time. And we always want to make sure we’re holding on to the best dividend payers. So let’s get to it…

~Round 1: Simple Business

We always prefer companies with simple businesses. Why? The fewer the moving parts, the easier it is to detect if a dividend is in jeopardy. To us, that’s the most important thing – income.

And both companies pass muster.

Home Loan is a mortgage servicing company. It collects and processes payments on mortgages and receives a fee in return. Hickory is a regional telecom company. It provides home and business phone, internet and digital TV services.

Doesn’t get much simpler than that.

Advantage: Draw

~Round 2: Steady Demand

Paying a dividend is a commitment. Like a marriage, shareholders expect companies to maintain them through both good economic cycles and bad. That’s a lot easier to do when a company boasts steady demand for its products.

In this case, HLSS comes out on top.

Sure, home ownership might be down. But it’s never going away. Accordingly, it benefits from a massive market opportunity to service mortgages associated with owning real estate.

On the other hand, telecom companies like HTCO face a much more uncertain future. The mobile phone is taking over the world, thereby eliminating the need for home phone service.

Even though HTCO has adapted to mostly serve businesses, the internet is changing the way businesses communicate. No doubt there are more changes on the horizon, too, which will require HTCO to stay ahead of the curve. As an investor, there’s a lot more risk that demand gets seriously dented for a technology company than a real estate-related one.

Advantage: Home Loan

~Round 3: Cash Flow Positive

Companies need cash to pay dividends. Simple as that. Our preference is for them to use cash from operations, as it’s the most sustainable financing source.

The good news? Over the last 12 months, HLSS and HTCO enjoyed positive operating cash flows. However, HLSS brought in enough cash to cover its dividend 4.7 times over. That’s superior to HTCO’s coverage ratio of 3.9.

Advantage: Home Loan

~Round 4: High Cash Balance

At a minimum, we want to invest in companies with enough cash in the bank to cover at least two quarters’ worth of dividends. Again, both companies satisfy our minimum requirement.

However, HLSS boasts a much bigger cash cushion. Its cash balance of $690.8 million can cover more than 21 quarters’ worth of dividend payments. In comparison, HTCO’s $5.2-million cash balance would only cover about four quarters’ worth of dividends.

Advantage: Home Loan

At this stage of the analysis, it doesn’t look like there’s much of a contest. But we’ve still got four more critical criteria to review, including the most important one – how much income we can expect to receive from each company.

Remember, both are getting ready to pay another dividend. So tune in on Monday to find out if Hickory is able to stage a mighty comeback and earn a spot in our portfolios.

Safe investing,

Louis Basenese

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