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Are you considering a new position in ~? Ally Financial (Allie 2.65%)? It’s not a crazy idea.? The company’s stock is currently very cheap, trading at less than 10 times trailing earnings per share and less than 9 times expected earnings over the next 12 months. The dividend yield is also not too bad at 3.5%.
But before you take the plunge, there are four things you should know. Good news? Not all of them are necessarily problems.
4 things to know about Ally Financial
If you’re reading this, you’re probably already familiar with this company. If not, Ally Financial is an online bank. While they may not often offer advanced banking services that require a visit to a physical branch, they do offer basic banking services such as checking accounts, credit cards, and loans. Customers will also have access to a national network of third-party ATMs. Consumers can very easily get all the banking services they need from Ally Financial.
But as an investor, that alone isn’t necessarily enough to buy a company’s stock. The world is becoming more and more open to the idea of a purely digital bank, just like any other business, but this bank also has its own unique advantages and disadvantages. Four of them stand out among the rest for now.
1. Most of our business is automobile financing.
Although it can offer a wide range of traditional banking services, know that most of its business comes from auto loans. In the third quarter of last year, we generated $377 million worth of pre-tax operating profit through our auto finance division, compared to only $84 million worth of corporate loan income and only $26 million worth of mortgage-related pre-tax profit. It was nothing more than This disparity has been the norm for as long as Allie has existed. In fact, the company was founded as an auto financier. It was formerly known as GMAC, the lending arm of financial institutions. general motors.
It’s not inherently a fatal flaw. However, the company will be subject to the ups and downs of the auto market, which is proving particularly volatile at the moment thanks to rising interest rates and rapid inflation, but consumers’ strong appetite for new cars is are opposed by needs.
2. Depreciation is on the rise
To this end, Arai’s amortization (or write-down) is increasing.
This is not surprising at all. Most consumers are currently feeling the pinch from rising prices and borrowing costs. National credit card debt hit a record $1.08 trillion as of the third quarter of 2023, as consumers scramble to cover ever-increasing costs, the Federal Reserve reports. This trend has pushed credit card delinquency rates to nearly 3%, the highest in decades. More specifically to Ally, Fitch Ratings reports that as of the third quarter of last year, the number of borrowers who were behind on their car payments was the highest since the mid-1990s.It would be weird if it was Ally Financial. It wasn’t Consumers are suffering.
The numbers: As of the third quarter, Ally’s overall net charge-off rate as a percentage of its loan portfolio reached 1.31%. It’s the highest amount in recent years. The same goes for overall net charge-offs. Provisions for future loan losses are also trending upward, but have not yet reached their pre-pandemic peak.
Data source: Ally Financial. Graph by author. The allowance for loan losses and net charge-offs are in the millions.
Of course, these write-downs reduce overall profits even if they do not require an actual cash outlay.
3. Dividends are still well covered by earnings
That said, Ally’s earnings are holding up better than you might think. That remains more than enough to continue to support online banks’ dividend payments.
The graph below speaks for itself. Earnings in the third quarter fell to just $0.88 per share, but that’s still enough to cover the current quarterly dividend of $0.30 per share. In fact, its current payout ratio of less than 40% of profits is a bigger cushion than some other, better-grounded, longer-lived dividend-paying companies can boast.
Normalized diluted EPS (quarterly) data by ALLY YCharts.
Investors should pay attention to Ally Financial’s shrinking earnings. However, dividend payments are not in immediate jeopardy at this time. By improving the quality of corporate loan portfolios, the economy as a whole could recover well before it becomes a problem.
4. Wall Street isn’t necessarily excited about Ally stock.
Last but not least, analysts don’t hate this stock, but they don’t completely love it either. While most of them rate it a Hold, the consensus price target of $34.61 is actually slightly below Ally stock’s current price.
This is a bit of a double-edged sword.
On the one hand, it’s worrying. If analysts don’t see clear upside, investors may not be willing to take a position in the company. The tangible rewards aren’t enough…at least for now.
On the other hand, the current lack of bullishness sets the stage for future bullishness. If Ally Financial starts beating expectations, there’s plenty of room for analysts to raise the stock price and raise the price target. This is a double benefit for existing shareholders. Firstly, due to the company’s solid performance, and secondly, due to the fact that Wall Street sees enough new potential to attract investor attention.
Of course timing is everything. Even if upgrades are planned, it’s difficult to know when the tailwinds will start blowing.
All investments involve some degree of risk. You just have to weigh it up.
So, is Ally a buy or a sell? Overall, the four key points above are not overwhelmingly bullish. The company certainly faces challenges, including the possibility that the situation will get worse before it gets better. This is a deterioration in the quality of their loan portfolios, which is chipping away at the profits that support stock price dividends. If you need more certainty in your portfolio, Ally stock may not be your best option right now.
However, if you’re willing to tolerate a little risk, this ticker is worth considering. Be sure to keep it on a fairly short leash, taking into account all the inherent risks.
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