Four new stocks made July’s Safest Dividend Yields Model Portfolio, which was made available to members on July 20, 2023.
Recap from June’s Picks
On a price return basis, our Safest Dividend Yields Model Portfolio (+6.3%) outperformed the S&P 500 (+4.1%) by 2.2% from June 22, 2023 through July 18, 2023. On a total return basis, the Model Portfolio (+6.5%) outperformed the S&P 500 (+4.1%) by 2.4% over the same time. The best performing large-cap stock was up 22%, and the best performing small-cap stock was up 15%. Overall, 11 out of the 20 Safest Dividend Yield stocks outperformed their respective benchmarks (S&P 500 and Russell 2000) from June 22, 2023 through July 18, 2023.
This report leverages our cutting-edge Robo-Analyst technology to deliver proven-superior[1] fundamental research and support more cost-effective fulfillment of the fiduciary duty of care.
This Model Portfolio only includes stocks that earn an Attractive or Very Attractive rating, have positive free cash flow (FCF) 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 strong FCF supports the dividend. We think this portfolio provides a uniquely well-screened group of stocks that can help clients outperform.
Featured Stock for July: OneMain Holdings Inc. (OMF: $45/share)
OneMain Holdings Inc. (OMF) is the featured stock in July’s Safest Dividend Yields Model Portfolio.
Since 2013, OneMain Holdings has grown revenue by 9% compounded annually and net operating profit after tax (NOPAT) by 17% compounded annually. OneMain Holdings’ NOPAT margin improved from 10% in 2013 to 20% over the trailing-twelve-months (TTM). An increase in NOPAT margins is enough to offset a slight decline in invested capital turns and help drive the company’s return on invested capital (ROIC) from 10% in 2013 to 18% over the TTM.
Figure 1: OneMain Holdings’ Revenue & NOPAT Since 2013
Sources: New Constructs, LLC and company filings
Free Cash Flow Exceeds Regular Dividend Payments
OneMain Holdings has increased its regular dividend from $0.25/share in 1Q19 to $1.00/share in 3Q23. The current quarterly dividend, when annualized, equals $4.00/share and provides an 8.9% dividend yield.
More importantly, OneMain Holdings’ free cash flow (FCF) easily exceeds its regular dividend payments. From 2019 to 1Q23, OneMain Holdings generated $3.5 billion (63% of current enterprise value) in FCF while paying $3.1 billion in dividends. See Figure 2.
Figure 2: OneMain Holdings’ FCF Vs. Regular Dividends Since 2019
Sources: New Constructs, LLC and company filings
As Figure 2 shows, OneMain Holdings’ regular dividends are backed by a history of reliable cash flows. Dividends from companies with low or negative FCF are less dependable since the company may not be able to sustain paying dividends.
OMF Is Undervalued
At its current price of $45/share, OneMain Holdings has a price-to-economic book value (PEBV) ratio of 0.6. This ratio means the market expects OneMain Holdings’ NOPAT to permanently fall 40% from TTM levels. This expectation seems overly pessimistic given that OneMain Holdings has grown NOPAT by 20% compounded annually since 2017 and 17% compounded annually since 2013.
Even if OneMain Holdings’ NOPAT margin falls to 17% (vs. 20% in the TTM) and the company’s revenue declines by 2% compounded annually for the next decade, the stock would be worth $58+/share today – a 29% upside. See the math behind this reverse DCF scenario. In this scenario, OneMain’s NOPAT would decline 5% compounded annually through 2032. Should the company’s NOPAT grow more in line with historical growth rates, the stock has even more upside.
Critical Details Found in Financial Filings by Our Robo-Analyst Technology
Below are specifics on the adjustments we make based on Robo-Analyst findings in OneMain Holdings’ 10-K and 10-Qs:
Income Statement: we made $262 million in adjustments with a net effect of removing $226 million in non-operating expenses (4% of revenue). Clients can see all adjustments made to OneMain Holdings’ income statement on the GAAP Reconciliation tab on the Ratings page on our website.
Balance Sheet: we made $3 billion in adjustments to calculate invested capital with a net increase of $1.9 billion. The most notable adjustment was $2.3 billion (63% of reported net assets) in total reserves. See all adjustments made to OneMain Holdings’ balance sheet on the GAAP Reconciliation tab on the Ratings page on our website.
Valuation: we made $188 million in adjustments, with a net increase of $182 million in shareholder value. The most notable adjustment to shareholder value was $185 million in total debt. This adjustment represents 3% of OneMain Holdings’ market value. See all adjustments to OneMain Holdings’ valuation on the GAAP Reconciliation tab on the Ratings page on our website.
This article was originally published on July 27, 2023.
Disclosure: David Trainer, Kyle Guske II, Italo Mendonça, and Hakan Salt receive no compensation to write about any specific stock, style, or theme.
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[1] Our research utilizes our Core Earnings, a more reliable measure of profits, as proven in Core Earnings: New Data & Evidence, written by professors at Harvard Business School (HBS) & MIT Sloan and published in The Journal of Financial Economics.