Sure Dividend

About the Author Sure Dividend

Sure Dividend is designed specifically to simplify the process of investing in high quality businesses with shareholder friendly managements for individual investors. Sure Dividend takes a quantitative approach to this task, while providing qualitative analysis backed up by fundamentals. The Sure Dividend approach uses The 8 Rules of Dividend Investing to simplify the process of investing in high quality dividend growth stocks.

Dividend Stock Analysis: Health Care Services Group, Inc. (HCSG)

Health Care Services Group, Inc. (NASDAQ:HCSG) provides housekeeping, laundry, facility maintenance, and food services to nursing homes, retirement facilities, rehab centers, and hospitals primarily in the United States. The company has a market cap of $2.2 billion and was founded in 1876.Health Care Services Group is a member of the Dividend Achievers Index. The company has increased its dividend payments each year since 2003. The Dividend Achievers Index is comprised of businesses with 10 or more consecutive years of dividend payments. You can see the current list of all 238 members of the Dividend Achievers Index here.This article will look at Health Care Services Group’s current events, competitive advantage, and future growth prospects. The company will be examined using The 8 Rules of Dividend Investing. The 8 Rules of Dividend Investing take a systematic approach to building a high quality dividend growth portfolio.

Business Overview

Health Care Services Group operates in 3 segments: Laundry & Linen, Dining & Nutrition, & Housekeeping. The image below shows the percentage of total revenue each segment generates for Health Care Services Group:

HCSG Revenue

Health Care Services Group currently operates only on the 48 mainland United States. The company has over 45,000 employees and services more than 3,700 facilities.
Competitive Advantage
Health Care Services Group is the largest housekeeping and laundry service provider to the health care industry in the United States. The company has the scale to serve large national clients. In addition, the company also serves smaller regional clients. The image below shows the geographic distribution of the company’s facilities under contract:
HCSG Store Distribution
The company’s competitive advantage comes directly from its large size. Health Care Services Group national scale gives it the ability to service health care businesses with operations throughout the United States.
Current Events & Growth Prospects

Health Care Services Group has grown earnings-per-share at a compound annual growth rate of 12% a year over the last decade. The company is benefiting from several macroeconomic tailwinds.The population of the United States is aging. As the baby boomer generation continues to age, demand for health care facilities is rising. This is a favorable trend for Health Care Services Group. An aging United States population means more demand for extended-stay health care facilities which in turn drives demand for Health Care Services Group’s services.Health Care Services Group has grown revenue-per-share at 10.1% a year over the last decade. The company’s earnings have grown faster than its revenues. This is a result of the company gaining efficiency as it grows in scale.Health Care Services Group showed excellent revenue growth of 14% in its most recent quarter. Dining and nutrition sales increased nearly 20% versus the same quarter a year ago. The company has excellent growth opportunities in dining and nutrition. The company can leverage its laundering and housekeeping relationships with current customers and add-in dining and nutrition services.The dining and nutrition segment has an ‘underutilized middle management’ layer. The segment is anticipating (and delivering) rapid growth which necessitates this middle management layer. As the segment grows, margins will rise as middle management is fully utilized.

Recession Performance

Health Care Services Group performed well during the Great Recession of 2007 to 2009. The company’s earnings-per-share through the Great Recession and subsequent recovery are shown below:

  • 2007 Earnings-per-share of $0.45
  • 2008 Earnings-per-share of $0.40
  • 2009 Earnings-per-share of $0.47
  • 2010 Earnings-per-share of $0.51

The company suffered only an 11.1% decline in earnings-per-share during the worst of the Great Recession. The company’s resiliency is not caused by long-term contracts. Health Care Services Group does not use long-term contracts to lock in customers. Instead, the company works to be efficient at its services and save its customer’s money. As a result, the company has an annual retention rate of over 90%.Health Care Services Group is able to do well during recessions because it operates in the health care industry. The health care industry is more resistant to recessions than most other industries. Health care is simply not something that can be cut back on when it is needed, regardless of the economic climate.

The 8 Rules of Dividend Investing

The sections below will compare Health Care Services Group to other businesses with a long history of dividend increases using the 5 Buy Rules from The 8 Rules of Dividend Investing. Each rule has a short ‘why it matters’ section, explaining why the rule is relevant.

Rule 1: 25+ Years of Dividends Without A Reduction

Health Care Services Group has paid increasing dividends each year since 2003. The company does not pass the strict requirements of the first rule of dividend investing, which is to have 25+ years of dividend payments without a reduction. Health Care Services Group will still be compared to other businesses with 25+ years of dividend payments without a reduction to show where the company ranks among other businesses with long dividend histories.Why it matters: The Dividend Aristocrats (stocks with 25+ years of rising dividends) have outperformed the S&P 500 over the last 10 years by 2.88 percentage points per year.

Source: S&P 500 Dividend Aristocrats Factsheet

Rule 2: Dividend Yield

Health Care Services Group has a dividend yield of 2.3%. The company has the 92nd highest dividend yield out of 163 businesses with 25+ years of dividend payments without a reduction.Why it Matters: Stocks with higher dividend yields have historically outperformed stocks with lower dividend yields. The highest-yielding quintile of stocks outperformed the lowest-yielding quintile by 1.76 percentage points per year from 1928 to 2013.

Source: Dividends: A Review of Historical Returns

Rule 3: Payout Ratio

The company has a high payout ratio of 83.1%. Health Care Services Group’s management is very committed to returning cash to shareholders through dividends. A high payout ratio makes it more likely that Health Care Services Group will be forced to reduce dividend payments if it runs into unforeseen difficulty. The company has the 153rd lowest payout ratio out of 163 stocks with 25+ years of dividend payments without a reduction.Why it Matters: High-yield, low-payout ratio stocks outperformed high-yield, high-payout ratio stocks by 8.2 percentage points per year from 1990 to 2006.

Source: High Yield, Low Payout by Barefoot, Patel, & Yao, page 3

Rule 4: Long-Term Growth Rate

Health Care Services Group has grown its revenues-per-share at 10.1% a year over the last decade. The company’s rapid growth gives it the 15th highest growth rate ranking out of 163 businesses with long dividend histories.Why it Matters: Growing dividend stocks have outperformed stocks with unchanging dividends by 2.4 percentage points per year from 1972 to 2013.

Source: Rising Dividends Fund, Oppenheimer, page 4

Rule 5: Long-Term Volatility

Health Care Services Group has a high stock price standard deviation of 33%. The company has the 112th lowest stock price standard deviation out of 163 businesses with long dividend histories.Why it Matters: The S&P Low Volatility index outperformed the S&P 500 by 2 percentage points per year for the 20-year period ending September 30th, 2011.

Source: Low & Slow Could Win the Race

Final Thoughts

Health Care Services Group does not rank highly using The 8 Rules of Dividend Investing. The company has a high payout ratio and high volatility, combined with only a mediocre dividend yield. Health Care Services Group is growing quickly, but appears overvalued at this time. The company is currently trading for a forward price-to-earnings ratio of 27. Dividend growth investors should look for better investment options that trade at more attractive valuations.