OneMain Holdings (NYSE: OMF), based in Evansville, Indiana, is a financial institution that specializes in personal loans to nonprime borrowers.
The business sounds risky, but over the past several years, including during the early stages of the pandemic, OneMain’s numbers have held up.
Net interest income, the measure of cash flow we use for lenders, has trickled higher in each of the past few years, including 2020 and 2021, which were rocky years for some businesses.
Net interest income rose from $2.8 billion in 2018 to $3.2 billion in 2019. Then it inched higher by another $100 million in each of the following two years. This year, net interest income is forecast to again rise by another $100 million, to $3.5 billion.
The company pays a $0.95 per share quarterly dividend, which comes out to a 10% yield. But the news gets even better…
OneMain has paid out special dividends in the past. It paid two special dividends in 2021, two in 2020 and one in 2019. And they were big.
In February and August of 2021, the company paid a $3.50 per share special dividend. This year, the company has not announced any special dividends, so when we analyze the dividend, we are looking only at the regular quarterly dividend, not special dividends.
In the four years OneMain has paid a dividend, the payout has grown every year by a considerable amount.
The company paid a $0.25 per share quarterly dividend in 2019, before increasing it to $0.33 and then to $0.45 in 2020. OneMain paid a $0.70 per share quarterly dividend in 2021, and it increased the payout to $0.95 this year.
Based on projected net interest income, OneMain’s payout ratio is a puny 13%. Again, that’s the regular dividend only, with an expected total payout of $467 million for 2022. Last year, OneMain paid out $1.3 billion in dividends (including special dividends), which was still just 38% of its net interest income.
It’s quite possible that in 2022, the company could pay a special dividend and still have a low payout ratio, like last year.
The only blemish on OneMain’s dividend safety is that the dividend history is short – just four years. After 2023, assuming OneMain hasn’t cut the dividend, that penalty will lift.
Even without the special dividend, OneMain’s yield is high. It’s rare to find such an attractive yield that appears so secure in the short term. Of course, a recession could hit OneMain’s borrowers hard. But for now, the dividend appears safe.
Dividend Safety Rating: B
Good investing,
Marc
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