3 wide-moat businesses catering to cash-strapped consumers

Just because the economy is under pressure doesn’t mean consumers stop spending money.

They just start spending money differently. And investors who want to make (and keep) the most money over the longest span of time need to understand how those changes can play out.

Budgeting shoppers might look for cheaper goods – or the same brands they always buy, just at lessened amounts. Or they might seek out loan options they otherwise wouldn’t.

But one way or the other, tighter economic conditions create opportunities for businesses that exist to serve those under financial stress.

Now, the particular stress America has been facing these past few years is rather unique. For instance, consumer spending has stayed strong overall “across channels, geographies, and categories,” as Levi Strauss (LEVI) CFO Harmit Singh recently noted.

Also worth noting is how Bank of America Institute recently showed that higher-income households’ after-tax wage growth rose 4.2% year over year last month. And while middle-income families came in much lower at 3.4%, the lower-income bracket saw a 4.1% gain.

That latter boost is largely due to a rise in job switching, which tends to boost wage gains.

Even so, I don’t expect this demographic to shift where they’re shopping very much. Most of us at any income level are creatures of habit. It’s more a matter of how much they’ll spend at those places.

Places that tend to feature:

As a result, they have strong cash flow to support dividends, stock buybacks, and growth-producing reinvestment strategies.

These might not be the most glamorous businesses on the planet. We’re not talking about Prada here, after all.

But they have wide moats with cash-conscious consumers. And since that category happens to be larger than normal right now, I think they’re especially worth a peek.

Consumers might still be spending, but traditional banks aren’t confident they can actually pay for it. As such, they’ve become much more selective about writing loans for non-prime borrowers.

That’s A-okay for OneMain Financial (OMF), which offers installment loans to those with limited access to traditional credit. Though it doesn’t just lend money; it’s also an underwriting expert thanks to decades of strategic purchases and practices.

OneMain has put together an impressive system composed of proprietary credit data and sophisticated risk models. And since it also works hard to understand each local market it operates in, this alternative financial institution has a significant edge over competitors.

Yet, in another sign of superiority, OneMain doesn’t chase growth. It seeks it out, yes, but doesn’t act on it unless the opportunity is right.

That matters considering how the very nature of its business puts it at risk of credit losses should the economy get worse. And it also matters how OneMain has successfully navigated numerous economic cycles by now.

So I’m confident it will be able to handle whatever’s to come. Since, in the short-term, that seems to be borrowing costs remaining elevated and credit availability even tightening further…

Demand for OneMain's products could easily grow from here.

The company already had a solid first quarter, with net income rising year over year from $213 million to $226 million. And diluted earnings per share (EPS) came in at $1.93 versus $1.78 million.

Its pretax income also climbed from $275 million to $296 million, while both revenue and interest income gained 6%. Moreover, early-stage delinquencies fell for the quarter, and the company was in an overall strong enough position to buy back $105 million in shares.

Even so, OMF is trading at about 9x earnings, putting it in the lowest tiers of the subprime lending space. Between that advantageous price point, its 6.9% dividend yield, and its consensus earnings growth of 21% next year and 17% in 2028…

We consider OneMain a Strong Buy at this time.

OneMain’s wide-moat characteristics include:

Another financial option cash-strapped consumers have is to buy now and pay later. Or, in the case of Upbound (UPBD), buy now and pay small installments until later.

You might have never heard of Upbound itself, but I bet you know its Rent-A-Center brand. There, you can find furniture, electronics, appliances, and other products available to rent with no credit checks required.

Alongside that, the company also has Acima, which would otherwise be a Rent-A-Center competitor. Acima basically buys anything on request – from couches to computers to tires – then leases it to the requester on a month-to-month basis.

Then there’s Upbound’s Brigit^TM service, a financial health app that pairs well with its two other branches. This offering helps consumers budget and build credit, while also providing cash advances when deemed viable.

This obviously comes with risks – the same exact ones that OneMain has, in fact. That’s just what happens when you’re deliberately advertising services to consumers who are working with less money.

However, also like OneMain, Upbound has existed for decades. Incorporated in 1986, it’s weathered both good times and bad repeatedly.

That’s never a guarantee of future success, of course. But it is a good indicator.

Speaking of past performance, Upbound’s Q1 revenue rose 3.7% year over year to $1.2 billion. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) gained almost 8% to hit $136 million. And non-GAAP (generally accepted accounting principles) diluted EPS grew 8% to $1.08.

I also have to point out operating cash of $171 million and free cash flow of $136 million – even after Upbound paid out around $23 million in dividends. This improved both net debt and leverage on its balance sheet, leaving liquidity at a comfortable $465 million.

At the moment though, shares are undervalued, trading at roughly 5.3x with a 7.1% dividend yield. This is despite consensus growth estimates for 13% in 2027 and 14% in 2028.

Another Strong Buy, we expect total returns here of at least 25% over the next 12 months.

Upbound’s wide-moat characteristics include:

Everyone knows Dollar General (DG). Even if you don’t frequent it, there seems to be a new one popping up on every other block.

But what “everyone” doesn’t know is that it’s not just another discount retailer. It’s actually a logistics company in disguise.

The reason why you see Dollar General everywhere is because it has over 20,000 stores, most of them located in the rural communities that need it most. And each one of those locations is carefully selected.

You might occasionally find one near a Walmart (WMT), but that doesn’t happen very often. Many other retailers would seek out such proximity for the traffic alone, but not Dollar General.

It looks to be the closest place to buy everyday essentials: an all-around convenience story if ever one was written. And its much smaller store sizes mean it can literally fit where Walmart can’t.

Dollar General might not offer the same one-stop shopping its bigger competitor does, but it doesn’t have to. It offers enough to make it worth budget-conscience customers’ while.

As with our other two picks today, Dollar General saw internal growth in Q1. Its net sales grew 3.4% year over year to $10.8 billion thanks to both new stores added and same-store activity.

Admittedly, comparable sales only grew 2%, with customer traffic rising 1.4% – hardly the most robust figures. Yet it was enough of an improvement that management raised full-year EPS from $7.10-$7.35 to $7.20-$7.45.

DG normally trades at a 19x multiple, but it’s currently sitting at 17x instead with a modest 2% dividend yield. That dividend does have a track record of over 50 consecutive years of growth, for the record, so we expect it to get better still from here.

With 9% estimated growth for 2027 and 11% in 2028, Wide Moat Research expects a total return of around 20% annualized on this stock.

Dollar General’s wide-moat characteristics include:

With those kinds of advantages in Dollar General, OneMain Financial, and Upbound, it’s hard not to at least consider their current prices as good places to buy in.

Happy SWAN investing!

Brad Thomas
Editor, The Wide Moat Daily

We put together another great Wide Moat Show episode for you this week titled “7 Strong Buys”… two of which come with especially attractive price points.

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