Invest Like (an Ethical) Boss Hogg

It seems like almost every town in the Southeast has its own “Boss Hogg.”

That’s a character from The Dukes of Hazard, the hit CBS show that ran from 1970 to 1985.

Hogg is the main antagonist, the sort of personality that’s easy to root against.

He’s a self-interested tycoon who runs everything in the fictional town of Hazzard, Georgia. As the sole commissioner, he also owns most every business there, plus properties and mortgages.

Yet despite having all that money, Hogg preys on distressed consumers who are working hard to feed their families. And, of course, it’s up to the Duke boys to foil his plans.

It’s a fun show, and maybe readers remember watching it. But believe it or not, Boss Hogg isn’t entirely fictional.

Sadly, I’ve seen the type in real life from Sandersville, Georgia; to Cullman, Alabama; to Walterboro, South Carolina; to Boone, North Carolina. These guys (or gals, in some cases) are easy to spot. They generally own a lot of land, control the local bank, and are very familiar with local politicians.

The common denominator, unfortunately, is that they make their ill-gotten gains from folks living paycheck to paycheck.

It’s a very easy way to get rich that way, I hate to say. There’s a whole lot of money to be made in the distressed consumer category considering how many distressed consumers exist.

These people have families to feed, mortgages to pay, and other mounting bills. Everyone knows the cost of living has increased immensely over the decades, and there’s only so much many people can do to keep up with it.

In which case, there’s always a “Boss Hogg” ready to lend “a helping hand.”

The Boss Hogg Way of Doing Business

I’ve got not one but two Boss Hoggs in my hometown. One runs a nationwide subprime car-lending business; the other owns 750 consumer finance branches across the U.S.

That latter company comes complete with the mission statement of helping “people get back on their feet and resume living life with a refreshed outlook and a restored sense of normalcy.”

That sounds so sweet… right until you read the footnote that the “maximum annual percentage rate (‘APR’), including interest, fees, and total loan costs, is 124.48%.”

I don’t know about you, but that doesn’t seem normal to me. I don’t know if I’d be where I am today if that was the only assistance I could secure back when I was struggling.

My regular readers know I went through some very difficult times starting in 2004. That was when my business partner decided to use our collective funds as his personal piggy bank. And then he tried to fix the resulting mess by turning to predatory lender Instant Cash.

None of that ended well for either of us, leaving both parties absolutely broke. The difference is that I was able to recover after several years of intense effort.

Partially because he owed such high interest, he’s still struggling today.

Admittedly, I got things back together right before the housing market crashed in 2008… meaning I was in for a whole ‘nuther round of hurt. It was a double-dip personal depression.

But, again, I was able to pull out of that, too, by cutting back on just about every expense and completely rewriting my employment possibilities. If one more thing had gone wrong in my life, I might very well have had to turn to Boss Hogg.

Which means I wouldn’t be here today.

In short, this whole lending game is personal. I don’t want to see anyone lose in the process of engaging with it.

That’s why you’ll never see me recommend any Hogg-like institutions, no matter how rich it might make you or me.

OneMain: Lending Done Right

If you’ve been reading Wide Moat Daily even just this year, you know I have high hopes for the future. All the same, I fully realize that the present leaves a lot to be desired.

As I already mentioned, there’s a lot of economic hurt going on right now. A recent survey from Forbes tells the story:

A 2023 survey conducted by Payroll.org highlighted that 78% of Americans live paycheck to paycheck, a 6% increase from the previous year. In other words, more than three-quarters of Americans struggle to save or invest after paying for their monthly expenses.

Similarly, a 2023 Forbes Advisor survey revealed that nearly 70% of respondents either identified as living paycheck to paycheck (40%) or—even more concerning—reported that their income doesn’t even cover their standard expenses (29%).

I’m also far too much of a capitalist to think that businesses should be forced to be charitable. Companies need to make money in order to exist. So if a company exists to lend money, it should be able to profit from the effort.

Just as long as it doesn’t do it in a predatory manner, I can salute its purpose of offering a necessary service to those in need.

That’s precisely what OneMain Holdings (OMF) does by providing credit access to over 3.4 million customers. It’s an omnichannel hybrid consumer finance model that operates around 1,400 branches and six operations centers across the U.S.

OMF’s unsecured loans average $9,000, with an average APR of 27%. And its unsecured borrowers’ average credit score is 645.

Direct auto loans, meanwhile, average $17,000, with an average 23% APR and a 624 credit score. All told, OneMain had around $2.5 billion worth of auto finance receivables as of last quarter.

Its overall loan yield was 22.4%, and 30-day delinquencies were 5.08%. That’s not bad, and OneMain CEO Douglas Shulman explained on the latest earnings call that the company isn’t “seeing any weakness in” its consumers. He believes the company is “uniquely positioned to manage during these uncertain times.”

He’s probably right considering how OneMain has one of the industry’s strongest and most diversified balance sheets – all while continuing to invest in new products and channels, data science, technology, and digital capabilities.

Its total first-quarter revenue was $1.5 billion, up 10% year over year. And analysts expect average annual earnings-per-share growth of around 25% through 2027.

Source: FAST Graphs

Shares are now trading at $50.19 with a 9.3 times price-to-earnings (P/E) ratio. That’s hardly a bargain considering its normal multiple of 8.1 times. But I still find OneMain attractive given its solid growth outlook.

The stock currently pays $1.04 per share in dividends with an 8.3% yield.

In short, OneMain offers a legitimate and well-run service that’s still all too necessary for far too many. I’m hoping someday in the future, this kind of service won’t have so much business.

But given the reality we’re living in right now? It’s a much, much, much better option than Boss Hogg for borrowers and investors alike.

Regards,

Brad Thomas
Editor, Wide Moat Daily