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Legendary stock market investor Warren Buffett is well known for the stocks he buys going up, but not all of them are amazing.Consumer bank stocks Ally Financial (Allie 10.71%) The stock has fallen since Buffett added it. berkshire hathaway‘s stock portfolio is down about 42% as of early 2022 from the peak reached in 2021.
Berkshire Hathaway sold 14 shares in the third quarter of 2023, seven of which were completely liquidated. But one thing that didn’t work out was Ally Financial.
Last year was a huge year for the stock market overall, with Ally Financial up 43% in 2023, but it still feels cheap. This is why investors looking for dividend income want to buy now and hold for the long term.
not old and boring
Ally Financial started as a financial division over a century ago. general motorsHowever, it was spun off in 2010 and rebranded as Ally Financial.
Ally may be one of the oldest banks in America, but it’s far from outdated when it comes to online banking. Its services are 100% digital. There are no physical branches. This is a huge advantage as it eliminates the labor and real estate costs associated with traditional banking.
As you might have guessed, Ally originates a lot of auto loans, not just GM dealerships. The company processed 3.7 million consumer vehicle applications in the third quarter, a new record for the company. Although the gap between interest paid to depositors and interest earned on loan balances narrowed in the third quarter, Ally’s net interest margin of 3.26% remains high enough to generate healthy profits.
Ally has an above-average dividend and has the potential to rise even higher.
At recent prices, Ally Financial stock has a healthy dividend yield of 3.6%, with the potential to grow exponentially over the next few years. Over the past five years, the company has increased its dividend by 76.5%, and we are likely to see similar increases going forward.
Despite recently compressed net interest margins, Ally Financial’s consumer banking business generated $3 billion in free cash flow in the 12 months ended last September. This is almost eight times the amount needed to meet the dividend commitment over the same period.
The average interest rate on new auto loans jumped to an estimated 10.7% in 2023, compared to just 7.1% in 2021. As its balance sheet improves, Ally’s net interest margin could reach new heights due to recently originated high-interest loans.
Ally currently pays a yield of about 4% on deposits. With the Fed expected to cut rates in 2024, Ally’s interest expense is likely to improve or at least stabilize.
With interest rates stable and a large volume of high-interest auto loans on the books, Arai is confident that its net interest margin will exceed 4% this year or next.
What to watch out for
The end of pandemic-related stimulus and soaring inflation didn’t turn out to be the disaster many investors feared. Arai’s auto loan amortization rate reached 1.85% in the third quarter. This is relatively high, but far from unmanageable.
Arai has been preparing for an even higher depreciation rate increase by maintaining stable dividend payments from the beginning of 2022. The bank could do so if it sees signs that the recession Ally is preparing for won’t happen, such as improved depreciation rates. The company will announce a significant increase in dividends by the end of 2024.
Great deal now
Ally stock trades at about 1 times the bank’s tangible book value and 9 times trailing 12-month earnings. At this low valuation, investors could be far ahead in the long run even if Ally’s business doesn’t grow.
Given Ally’s recent performance and the resilient U.S. economy, significant growth seems much more likely than stalling in the coming years. Taken together, this bank looks like a great addition to almost any income investor’s portfolio.
Ally is an advertising partner of The Motley Fool’s Ascent. Cory Renauer has a position at Ally Financial. The Motley Fool has a position in and recommends Berkshire Hathaway. The Motley Fool recommends General Motors and recommends the following options: Long January 2025 $25 calls on General Motors. The Motley Fool has a disclosure policy.
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