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Ex-Dividend Stock Wars (Revisited): Home Loan Servicing Solutions vs. Hickory Tech Corp. (Part 2)

We’re picking up right where we left off on Thursday in our ex-dividend stock war between Home Loan Servicing Solutions (HLSS) and Hickory Tech Corp. (HTCO).

You’ll recall, Home Loan outdueled Hickory in the early rounds. But a battle is never over until the final bell is rung.

With that in mind, let’s finish up our blow-by-blow fundamental analysis of the two stocks. That way, we can declare the victor and boost our income by adding the company to our portfolios.

So let the battle resume…

~Round 5: Minimal Need for Credit

We all know that interest rates can only head higher from here. For companies with a ton of debt, that’s problematic. Because as interest rates rise, so do their interest payments.

Of course, higher expenses leave less money behind to pay dividends. So we need to be aware of this risk, too.

At first blush, it appears that the $1.6-billion market cap Home Loan is loaded to the gills with loans. Yahoo! Finance reports that the company’s total liabilities top $5.5 billion. (Yikes!) However, digging into the financial statements reveals that’s not the case…

Over 90% of the liabilities are an accounting offset for a line item that’s recorded as an asset on the company’s balance sheet. Long story short, the company’s actual debt checks in at a much more reasonable level of about $350 million.

In contrast, as a telecom, Hickory operates a much more capital-intensive business. And it shows. The amount of debt it currently carries ($149 million) is almost equal to the company’s entire market cap ($156 million).

While neither company is debt free, Hickory is clearly the riskier of the two.

Advantage: Home Loan

~Round 6: Earnings Buffer

Cash serves as an undeniable buffer against an unexpected downturn and the need to cut dividends. But earnings can help, too. That is, as long as a company doesn’t pay out 100% of its earnings.

As longtime readers can attest, I prefer an earnings buffer of at least 20% – that is, companies with a dividend payout ratio (DPR) of less than 80%.

In this case, neither company passes muster. But one is much closer to qualifying than the other.

Home Loan’s DPR checks in at 82% over the last 12 months. That compares to a DPR of 96% for Hickory.

Advantage: Home Loan

~Round 7: Dividend Yield and Growth

When it comes to dividend investing, above all else, we’re interested in income. Income that keeps increasing, I might add. And this round is as close as it gets to a knockout.

At current prices, Hickory yields 5.2% and Home Loan yields 7.9%.

That’s a meaningful difference. What’s even more meaningful, though, is the difference in dividend growth rates.

While Hickory consistently raised its dividend once per year since 2010, Home Loan increased its dividend seven times over the last 18 months.

It’s also worth noting that Home Loan pays a monthly dividend, whereas Hickory only pays quarterly. So Home Loan represents a compelling way to generate extra income every month.

Like I said, this round really isn’t much of a contest.

Advantage: Home Loan

~Round 8: Valuation

The potential for capital appreciation shouldn’t be our primary concern. But we shouldn’t ignore it, either. The more, the better, right? That means focusing on buying companies on the cheap.

In this case, both companies trade at attractive valuations relative to the S&P 500 Index on a forward price-to-earnings ratio basis. But Home Loan is the most compelling bargain, as it also trades at a double-digit discount to the S&P 500 on a price-to-earnings and price-to-book ratio basis.

Advantage: Home Loan

Let’s Go to the Scorecard…

In case you weren’t keeping track, here’s the final score: Home Loan: 7… Hickory: 0, with a tie in one category. So once again, Home Loan reigns supreme.

If you choose to invest in the company, please remember that you need to own shares one day prior to the ex-dividend date of October 29 to receive the next payment.

That’s it for today. Before you go, though, let us know what you think about this column – and any other companies you’d like us to pit against one another in an ex-divided stock war – by emailing us here.

Safe investing,

Louis Basenese