Is Arai Financial stock worth buying?

2023 was a pretty disappointing year for investors, but in recent months, Ally Financial (Allie -0.57%) It was completely torn. The stock is up about 45% since the beginning of November.

Perhaps investors are starting to forget about the local bank fiasco earlier this year.Furthermore, the outlook for more accommodative policies federal reserve Market sentiment may increase in 2024.

is this digital bank stocks Is it wise to buy now? Here are some important things investors should know when making decisions.

Consideration for shareholders

One of the best things about this business is how shareholder-friendly its capital allocation policy is. Ally Financial’s current quarterly dividend is $0.30 per share, nearly four times as much as it paid just seven years ago. And its yield is currently at a fairly high level of 3.4%.

Additionally, Ally’s management is consistently focused on reducing the number of outstanding shares by: buyback. Over the past five years, from Q3 2018 to Q3 2023, the company has repurchased 28% of its stock. The positive effect on earnings per share can be significant.

Ally’s steady growth in its most important areas allows it to do a great job of returning capital to shareholders. The company’s customer base has now grown for 58 consecutive quarters.

And perhaps more impressively, the business’s deposit base continues to grow. As of September 30, Ally had $153 billion in deposits, an increase of 5% from the same period last year. This provides banks with a stable source of capital that they can use to finance their main product: auto loans.

If these trends continue, dividends and share buybacks will continue to be a big part of Ally’s investment story.

Allies are sensitive to economic fluctuations

Despite the positives, there are some reasons to be concerned. At its core, Ally is still a bank. And this leaves them susceptible to the vagaries of the broader economy. In other words, the company is periodic.

The problem with circular businesses is that their success depends on favorable economic conditions. And these factors, such as interest rates, unemployment, and consumer confidence, are completely outside of your control.

Ally’s net charge-off rate has been increasing for at least the past four quarters, and this negative trend is worth keeping an eye on. And the company’s net interest margin continues to shrink, primarily due to much higher interest rates paid on the deposits it uses to fund loans. This poses a serious headwind in the short term.

The bear case is convincing.

Investors may still want to jump on the bandwagon and buy the stock, even considering the fact that Ally is a cyclical business like its banking peers. That’s because after aggressive interest rate hikes, the Federal Reserve could reverse course and cut rates multiple times in 2024. This could increase demand for loans from borrowers, lower the interest rates paid to depositors, and increase net interest income.

The strategy of buying a cyclical stock like Ally just before the economy picks up and selling it just before the economic downturn seems like a very smart idea. However, consistently timing the market is nearly impossible. Therefore, I consider this strategy to be a failed proposition.

I also don’t like Ally’s reliance on a single product: auto loans, which account for 45% of its total earning assets. Factors such as car prices, interest rates, gas prices, and supply chain issues can all have an impact. I am concerned about the possibility of negative developments in the industry.

Even though this bank stock is trading at a high price. stock price earnings ratio I do not plan to buy the stock, as it is in line with the past 10-year average, which suggests the stock is reasonably valued. Regarding Arai Financial, I think the risks outweigh the positives.