OneMain Holdings (NYSE: OMF) is in the business of providing personal loans, mostly to borrowers with less-than-stellar credit ratings. It sounds like a risky business – the kind that might employ Rocky Balboa… before he got lucky against Apollo Creed. Twice.
Whatever OneMain is doing to write and collect on its loans is working, as net interest income – the difference between OneMain’s borrowing costs and what it makes from lending – has been steadily rising.
Rising interest rates, low unemployment and rising wages are a perfect combination for OneMain’s borrowers to be able to pay back their loans and for the company to generate more profits and cash flow…
The company pays a $1 per share quarterly dividend, which comes out to a 10% annual yield. It has raised its dividend every year since it began paying one in 2019.
It also paid special dividends in 2019, 2020 and 2021, but it did not pay one in 2022 (and hasn’t so far this year). Though to be fair, the regular dividend has quadrupled since 2019.
OneMain can easily afford to pay a special dividend and raise the regular dividend again in the near future. It is expected to pay out just 12% of its net interest income in dividends in 2023. Last year, it paid a paltry 13%. In general, I want to see payout ratios of 75% or lower for most companies. So a low-double-digit payout ratio is extraordinarily small.
It’s extremely rare for a double-digit yielder to have such a low payout ratio. That means even if more of OneMain’s loans go bad, shareholders should have nothing to worry about when it comes to the dividend.
A double-digit yield typically isn’t safe, but OneMain Holdings’ is.
Dividend Safety Rating: A
— Marc Lichtenfeld
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Source: Wealthy Retirement