This Trade on a High-Yield Financial Is Home on the Range
Here's a strategy that offers attractive return potential, including dividends, even if this 8.5% yielding stock trades sideways.
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Today, we are putting a financial holding company in the spotlight as a covered call trade idea. OneMain Holdings OMF originates, underwrites, and services personal loans secured by automobiles and other titled collateral as well as provides unsecured loans. The company also offers credit cards and various insurance products.
OMF shares have been rangebound as stresses have mounted around the consumer base it serves. The stock has traded between $44 and $52 a share throughout 2024.
Like most banks, it is seeing an upward trend in its credit loss provisions, although it is a manageable one. At the end of the first quarter, its credit loss provisions were three times its current delinquencies. Its 30-day delinquency rate is right where it was at the end of 2022. The company appears to be well positioned to handle a worsening economy. The financial institution is also benefiting from higher net interest margins.
Falling inflation levels should alleviate some pressure on OneMain's consumer base, which hopefully will also get an incremental boost from Fed Chair Powell starting to cut the Fed Funds rate at the September FOMC meeting.
Another thing OMF stock has going for it is that it is cheap, trading at around nine times forward earnings estimates. This compares to what I believe is a somewhat farcical valuation of over 22 times forward earnings for the S&P 500.
The current analyst firm consensus is that profits will be flat or slightly higher this year and analysts project a substantial earnings bump in 2025. However, at this valuation those 2025 projections have room to come down without impacting the stock much. Revenues are on pace to grow in the mid-single-digits in 2024 and are pegged to increase in the high single-digits in 2025.
Probably the best thing about this OMF stock is its big fat dividend yield, which currently stands at 8.5%. Despite a challenging environment, management had the confidence to boost its quarterly dividend payout by 4% in April.
The covered call strategy I like around this name one that uses a call strike a bit below the current trading levels of the stock. This provides extra downside protection in an uncertain economic environment and allows to me to capture significant quarterly dividends and additional return as well.
Option Strategy
Here is how one can initiate a position in OMF utilizing a covered call strategy. Remember, covered call orders involve buying an equity and simultaneously selling just-out-of-the-money call strikes against the new position.
Selecting the January $47.50 call strikes, fashion a covered call order with a net debit in the $44.90 to $45.10 a share range (net stock price - option premium). Liquidity is solid with the options against this equity.
This strategy provides downside protection of approximately 13% over the trade’s duration, which includes two quarterly dividend payouts of $1.04 a share. This strategy also provides return potential of approximately 10%, including dividends, even if the stock trades flat over its just under six-month option duration.
At the time of publication, Jensen was long OMF.
