OneMain Holdings’ Cash Flow Increases The Safety Of Its Dividend Yield

Recap from February’s Picks

On a price return basis, the Safest Dividend Yields Model Portfolio (-2.8%) underperformed the S&P 500 (+2.3%) by 5.1% from February 18, 2022 through March 21, 2022. On a total return basis, the Model Portfolio (-2.5%) underperformed the S&P 500 (+2.7%) by 5.2% over the same time. The best performing large cap stock was up 5% and the best performing small cap stock was up 6%. Overall, 3 out of the 18 Safest Dividend Yield stocks outperformed their respective benchmarks (S&P 500 and Russell 2000) from February 18, 2022 through March 21, 2022.

This Model Portfolio only includes stocks that earn an attractive or very attractive rating, have positive free cash flow and economic earnings, and offer a dividend yield greater than 3%. Companies with strong free cash flow provide higher quality and safer dividend yields because I know they have the cash to support the dividend. I think this portfolio provides a uniquely well-screened group of stocks that can help clients outperform.

Featured Stock for March: OneMain Holdings Inc.

OneMain Holdings Inc (OMF) is the featured stock in March’s Safest Dividend Yields Model Portfolio.

OneMain Holdings grew revenue and net operating profit after-tax (NOPAT) by 15% and 26% compounded annually, respectively, from 2015 to 2021. OneMain Holdings’s NOPAT margin rose from 13% in 2015 to 23% in 2021, while invested capital turns improved from 0.7 to 0.9 over the same time. Rising NOPAT margins and invested capital turns drove the company’s return on invested capital (ROIC) from 10% in 2015 to 21% in 2021.

Figure 1: OneMain Holdings’s Revenue and NOPAT Since 2015

Free Cash Flow Supports Regular Dividend Payments

OneMain Holdings has paid dividends in each of the past three years and increased its regular dividend from $0.25/share in 2017 to $0.95/share in 2021. The current regular quarterly dividend, when annualized, provides an 8.0% dividend yield.

Since 2019, OneMain Holdings’s cumulative FCF easily exceeds its regular dividend payments. From 2019 to 2021, OneMain Holdings generated $2.4 billion (40% of current market cap) in FCF while paying ~$665 million in regular dividends, per Figure 2. The company’s 20% rise in NOPAT since 2019 and 7% decline in average invested capital, have driven the improvement in its FCF. Should the company continue to grow NOAPT from the same amount or less of invested capital, its FCF will continue to improve.

Figure 2: OneMain Holdings’s FCF vs. Regular Dividends Since 2019

Companies with strong FCF provide higher quality dividend yields because the firm has the cash to support its dividend. Dividends from companies with low or negative FCF cannot be trusted as much because the company may not be able to sustain paying dividends.

OneMain Holdings Is Undervalued

At its current price of $47/share, OneMain Holdings has a price-to-economic book value (PEBV) ratio of 0.4. This ratio means the market expects OneMain Holdings’s NOPAT to permanently decline by 60%. This expectation seems overly pessimistic given that OneMain Holdings grew NOPAT by 24% compounded annually over the past five years.

Even if OneMain Holdings’s NOPAT margin falls to 18% (five-year average vs. 23% in 2021) and the company’s NOPAT falls by 2% compounded annually over the next decade, the stock is worth $85/share today – an 81% upside. See the math behind this reverse DCF scenario. Should the company grow NOPAT more in line with historical growth rates, the stock has even more upside.

Critical Details Found in Financial Filings by My Firm’s Robo-Analyst Technology

Below are specifics on the adjustments I make based on Robo-Analyst findings in OneMain Holdings’s 10-K:

Income Statement: I made $206 million in adjustments with a net effect of removing $166 million in non-operating income (3% of revenue).

Balance Sheet: I made $2.7 billion in adjustments to calculate invested capital with a net increase of $1.9 billion. The most notable adjustment was $2.1 billion (57% of reported net assets) related to total reserves.

Valuation: I made $157 million in adjustments with a net effect of decreasing shareholder value by $139 million. Apart from total debt, one of the most notable adjustments to shareholder value was $9 million in overfunded pensions. This adjustment represents <1% of OneMain Holdings’s market value.

Disclosure: David Trainer, Kyle Guske II, and Matt Shuler receive no compensation to write about any specific stock, style, or theme.