Ally Financial (NYSE:ALLY) has announced a plan to repurchase up to $1.6 billion of common stock in 2021.

It comes just weeks after the Federal Reserve cleared the way for banks to conduct stock buybacks, which it had put on hold last March when the pandemic hit. The go-ahead followed a round of stress testing wherein the Fed put the banks through hypothetic scenarios to see how they would function during an extended downturn.

Ally, the 16th largest bank in the country with about $174 billion in assets, will start repurchasing shares in the first quarter. The buyback plan is in accordance with the Fed's restrictions that limit combined repurchases and dividends to an amount that is less than the average net income of the four preceding quarters.

The words "stock buyback" are outlined in yellow in the center of a maze of financial terms all written in white letters.

Image source: Getty Images.

In addition, Ally declared a quarterly cash dividend of $0.19 per share, payable Feb. 12.

CEO Jeffrey Brown said: "The results of the Federal Reserve's stress test reflect the strength of Ally's balance sheet and capital position, allowing us to resume our share repurchase program, an important component of Ally's capital allocation framework. We enter 2021 with excess capital relative to both regulatory requirements and internal targets and are well positioned to continue delivering long-term value for our customers, communities and shareholders."

When companies buy back their stock, it returns wealth to shareholders and reduces the amount of shares on the market, which has the effect of improving earnings per share.

Ally is not the first bank to announce buyback plans for 2021; JPMorgan Chase and Morgan Stanley have already done so.

Ally stock jumped over 3% in trading on Wednesday and is up 11.5% year to date to about $39 per share. Analysts are bullish on the stock, predicting a price target of $48 for 2021 as the economy recovers.

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