7.4% a year from a company that lends to people rejected by banks. Is it safe?
OneMain pays a yield that banks can only dream of, and this year it’s growing faster than it has in years. Yet the stock is down 16% since January and the dividend has stalled. The secret lies in a single percentage point that determines half the payout.
Key points
A stock yielding 7.4% is down 16% since January, even as the company grows at its fastest pace in several years.
A single extra percentage point in one item determines half of the annual dividend.
The company lent 17% more in the third quarter than a year ago, and the market punished it with a 4.7% drop.
On the conference call, the CEO hinted at where the extra money for shareholders will go instead of the dividend.
Wall Street analysts see a target price 12% higher.
A shopping-mall branch that pays more than most banks
OneMain Holdings $OMF is a company most European investors have never seen, yet in the US you’ll pass one in every other shopping mall. With more than 1,300 branches in 48 states and 3.8 million customer accounts, it lends to people banks have turned down: borrowers with weaker credit who need a few thousand dollars for car repairs, dental work, or consolidating expensive debt. According to its annual report, the company estimates this market is worth $1.3 trillion in the US, and OneMain manages $28.1 billion in receivables from it.
Imagine a used-car dealer who arranges a loan along with the car. OneMain is that loan, just without the car and at an average annual interest rate of 22.6%. That pays for a dividend of 4.20 USD per share, which at the November 3 closing price of 56.58 USD yields 7.4%. By comparison, big banks typically yield around two to three percent.
But the market isn’t rewarding the company for it. The stock is down 16.2% year to date and 6.5% over the past twelve months, while the S&P 500 index gained 11.8% over the same period. A P/E of 8.5 is the kind of valuation given to companies the market expects to run into trouble, not companies currently growing at their fastest pace in years. And that’s exactly what OneMain is doing.