I've been a major believer in financial technology, or fintech, for some time. The world is rapidly going cashless, there's tremendous disruption in the payments space, and above all, customers are expecting more from their financial institutions than ever before.
While it isn't exactly one of the big fintech players, there's a lot to like about Ally Financial (ALLY -0.07%). In fact, unless something dramatic changes with the business in the near future, I'm planning to add this stock to my own portfolio.
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What does Ally Financial do?
Ally Financial might not be a household name, but this is a financial firm with a history dating back over a century. Before the financial crisis, the company was known as GMAC, the financial arm of General Motors (GM 4.37%).
Because it was spun out of General Motors, it shouldn't come as much of a surprise that Ally is one of the nation's largest auto lenders. In the first quarter alone, it originated about $11.6 billion in auto loans with a 7.1% average yield.
It also has a large auto insurance brokerage, and its massive auto-lending presence gives it a natural source of insurance customers. And, despite major supply challenges in the auto industry, Ally processed more auto loan applications in 2021 than ever before.
The company also operates Ally Bank, which is the more exciting growth opportunity. The bank has 2.5 million retail customers (steadily growing from 1.1 million in 2016) with a combined $136 billion in deposits, which gives it a low-cost source of funding for its lucrative auto lending business. The bank makes mortgage loans, personal loans, offers a credit card, and also makes corporate loans. And the company has an investment platform, Ally Invest, that offers online brokerage and robo-advisory services and has nearly quadrupled in size over the past six years.
Why is Ally an attractive stock right now?
Ally is a highly profitable business. Because it is an online-based bank, it is significantly more efficient than most brick-and-mortar financial institutions, as evidenced by its 18% return on equity (most banks are happy with 13% to 14%). The bank ran a 29% net profit margin in the first quarter and has consistently showed this level of profitability. Because it focuses on auto loans, which have relatively high interest rates, and it funds its operation with low-cost consumer deposits, Ally has a net interest margin of just under 4% -- roughly double what some of the largest banks in the U.S. produce.
In addition, Ally is a rather cheap stock. It trades for less than 1.1 times book value and just five times trailing-12-month earnings per share.
Ally also prioritizes the return of capital to shareholders, both in the form of dividends and buybacks. It has increased its dividend by 275% since 2016 and yields about 2.8% annually. Plus, the company has been aggressively buying back stock for years, anticipating $2 billion in buybacks in 2022 alone.
Keep in mind that Ally's entire market cap is under $14 billion. Since 2016, its outstanding share count has declined by more than 32%. This shareholder-friendly capital activity combined with a highly profitable business and cheap stock is a recipe for a great long-term value investment.
What if the market downturn continues?
To be perfectly clear, I'm planning to buy and hold Ally as a long-term investment. I have absolutely no clue what the stock will do over the next few weeks or months. Plus, if inflation stays elevated longer than expected, or if the U.S. economy falls into a recession, it's entirely possible for the stock to fall in the near term.
However, I'm buying for the long term. Ally's business is very profitable and should be just fine if the economy gets worse. The company's aggressive buybacks become even more effective if the stock price goes down. And above all, this is a cheaply valued fintech that could have a very bright future.
