Summary of February selections
Based on price return, the Safest Dividend Yields model portfolio (-2.8%) underperformed the S&P 500 (+2.3%) by 5.1% from February 18, 2022 to March 21, 2022. On On a total return basis, the model portfolio (-2.5%) underperformed the S&P 500 (+2.7%) by 5.2% over the same period. The best performing large cap stocks rose 5% and the best performing small cap stocks rose 6%. Overall, 3 of 18 Safest Dividend Yield stocks outperformed their respective benchmarks (S&P 500 and Russell 2000) from February 18, 2022 to March 21, 2022.
This model portfolio only includes stocks that are rated attractively or very attractively, have positive free cash flow and economic earnings, and offer a dividend yield greater than 3%. Companies with high free cash flow offer higher quality and safer dividend yields because I know they have the cash to support the dividend. I think this portfolio offers a particularly well-selected group of stocks that can help clients outperform.
Featured stock for March: OneMain Holdings Inc.
OneMain Holdings Inc (OMF) is the featured stock in the March Safest Dividend Yields model portfolio.
OneMain Holdings increased revenue and net operating income after tax (NOPAT) by 15% and 26% compounded annually, respectively, from 2015 to 2021. OneMain Holdings’ NOPAT margin increased from 13% in 2015 to 23% in 2021, while the invested capital turns improved from 0.7 to 0.9 during the same period. Rising NOPAT margins and capital turnover have increased the company’s return on invested capital (ROIC) from 10% in 2015 to 21% in 2021.
Figure 1: OneMain Holdings and NOPAT revenue 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 , offers a dividend yield of 8.0%.
Since 2019, OneMain Holdings’ cumulative FCF easily exceeds its regular dividend payouts. From 2019 to 2021, OneMain Holdings generated $2.4 billion (40% of current market capitalization) in FCF while paying approximately $665 million in regular dividends, according to Figure 2. The 20% rise in NOPAT of the company since 2019 and a 7% decline in average invested capital, drove the improvement in its FCF. If the company continues to develop NOAPT from the same or less amount of invested capital, its FCF will continue to improve.
Figure 2: OneMain Holdings FCF vs Regular Dividends Since 2019
Companies with a high FCF offer higher quality dividend yields because the company has the cash to support its dividend. The dividends of companies with a low or negative FCF cannot be trusted as much because the company may not be able to continue paying dividends.
OneMain Holdings is undervalued
At its current price of $47/share, OneMain Holdings has an economic price-to-book (PEBV) ratio of 0.4. This ratio means that the market expects OneMain Holdings’ NOPAT to decline permanently by 60%. This expectation seems overly pessimistic given that OneMain Holdings has increased NOPAT by 24% compounded annually over the past five years.
Even if OneMain Holdings’ NOPAT margin falls to 18% (five-year average from 23% in 2021) and the company’s NOPAT drops 2% compounded annually over the next decade, the stock is worth today $85/share, an increase of 81%. . Discover the calculations behind this reverse DCF scenario. If the company develops NOPAT more in line with historical growth rates, the stock has even more potential.
Critical Details Found in Financial Documents by My Company’s Robo-Analyst Technology
Below are details of the adjustments I’m making based on Robo-Analyst’s findings in OneMain Holdings’ 10-K:
Income statement: I made adjustments of $206 million, with the net effect of removing $166 million of non-operating revenue (3% of revenue).
Balance sheet: I made adjustments of $2.7 billion 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 adjustments of $157 million with a net effect of decreasing shareholder value of $139 million. Besides total debt, one of the more notable shareholder value adjustments was $9 million in overfunded pensions. This adjustment represents
Disclosure: David Trainer, Kyle Guske II, and Matt Shuler receive no compensation for writing about a specific stock, style, or theme.