Ally Financial Stocks: Buy, Sell or Hold?

Over the past 5 years, S&P 500The total return including dividends reached approximately 100%. This is a very impressive result that single-stock investors should strive to get ahead of.

Unfortunately, alliance finance (ally 0.08%) The results fell well short of this mark. Including dividends, the stock price return since March 2019 was only 67%. However, optimism appears to be growing as the stock price has surged 38% this year.

Should investors buy it, sell it, or hold it? bank stocks? To provide clarity, I think it’s best to analyze both sides of the aisle before drawing any conclusions.

Purchase and retention examples

Ally stands out in the crowded financial services industry because it is America’s leading digital bank. Despite not having physical bank branches, which helps keep overhead costs in check, Ally has 11 million customers, which speaks to its scale.

This digital business model hasn’t stopped Ally from offering a variety of services, such as checking and savings accounts, brokerage products, and loans. This creates cross-selling opportunities, and the number of Ally customers using multiple products has more than tripled over the past four years.

It is very encouraging to see banks continuing to grow their deposit base as it provides businesses with a low-cost source of funding that they can use to take out more loans. As of December 31, Ally had $142 billion in retail deposits. balance sheet, which is an increase of more than 3% compared to the previous year. It’s worth noting that because it doesn’t have branches, Ally can offer much higher savings rates than regular banks.

As mentioned above, Ally hasn’t made great investments over the past few years, but investors will likely appreciate management’s favorable capital allocation policy. The business currently pays a dividend yield of 3.2%, with quarterly payouts having steadily increased over the past eight years.

Ally also continually repurchases its own stock. The number of shares outstanding declined by more than 4% in 2023 alone. Earnings per share For existing investors

Examples of selling

Like other banks, Ally’s business is highly cyclical. Changes in interest rates have a particular impact on a bank’s success. This may add too much risk for some investors.

Ally reported net income of $1 billion in 2023, down 40% from the previous year. A sharp rise in deposit rates has put pressure on net interest margins, which has not been offset by higher interest rates charged to borrowers. And rising defaults will require Ally to raise more capital to cover its losses.

Then, the advent of interest rate cuts federal reserve bank This will be good news for the banking industry. But when this will actually happen is anyone’s guess.

Not only will Ally have to wait for macro trends to improve to get into better financial shape, it also relies on a more solid backdrop in the auto industry. A whopping 45% of the company’s leases and loans consist of retail auto-related financial products. Supply chain conditions and car prices can have a big impact on Ally’s results. This is completely beyond the company’s control.

It also doesn’t help that 43% of auto loan activity in the fourth quarter came from: general motors and mainly agency. So there’s definitely a customer focus here.

Owning a company that experiences cyclicality while having high exposure to a single industry and product can be reason enough to sell a stock. Actually, this is how I see the situation. I believe the bearish argument is more persuasive than the bullish argument.