Warren Buffett's holding company, Berkshire Hathaway owned about 44 stocks as of the end of the second quarter, according to a recent filing. Some of them he's owned for decades and others are recent purchases. We know he loves bank stocks and dividend stocks, and in addition to standbys such as Bank of America and American Express, Buffett recently bought shares of Ally Financial (ALLY +2.52%). Is this a great dividend stock for you to consider as well?
Why does Buffett like Ally?
There are several elements of Buffett's investing approach, and he goes all out, literally often to a company's headquarters, before investing in or acquiring a business. However, any investor can glean wisdom from a more simplified version of what Buffett does and apply it to their own situation.
NYSE: ALLY
Key Data Points
If you look at Ally's model, it aligns quite well with Buffett's philosophy. Buffett looks for undervalued stocks -- stocks that are trading at prices beneath their intrinsic value. It may not always be easy to define intrinsic value. Often, stocks are valued based on standards that are subjective. For example, Ally shares trade at a price-to-earnings (P/E) ratio of less than 5. That's considered extremely cheap relative to other stocks in general. The P/E ratio measures the price of each share as a multiple of the company's trailing 12-month earnings per share. Bank stocks typically trade at low valuations, but Ally is cheap even compared with other bank stocks, such as Bank of America, JPMorganChase, Wells Fargo, and Citibank.
ALLY PE Ratio data by YCharts.
But it's also cheap according to its price-to-book value, which is a more intrinsic measure, because it measures the share price relative to the value of the company's assets. If the price-to-book value is less than 1, it suggests the shares are trading for less than the value of the company's assets, which makes it seem undervalued. That gives investors some margin of safety when buying a stock, which is something important to Buffett.
ALLY Price to Book Value data by YCharts.
Buffett also loves dividend stocks. That might be because the dividends add up to huge amounts of cash for Berkshire Hathaway to invest in new projects. But it's likely also due to the fact that dividend-paying companies are typically established, secure, and low risk, and it means that the company is generating excess cash, meaning it's a quality company.
Buffett is an even bigger fan of share buybacks, since they increase the size of his holdings without him lifting a finger. They also automatically raise earnings per share because net income is spread over a small number of shares outstanding. Ally repurchased $584 million of stock in the first quarter and $600 million of stock in the second quarter, which is a large percentage of its total market cap of about $10.5 billion.
Is Ally a great stock to own?
Ally is cheap, but it's got to be more than that, since Buffett likes quality. Ally started out in the auto loan industry, and as its core business, that's been very strong. With a car shortage and rising interest rates, this segment has done very well. Auto finance assets increased more than $7 billion year over year in the second quarter to $108 billion, driven by growth in auto loans.
Its personal loan segment also performed very well in the second quarter, with loan originations up 98% year over year and and active borrowers up 78% over last year. Credit card balances increased 93% over last year, with active customers up 58%. Mortgages dropped along with the housing market, and as a bank, Ally is subject to the waxing and waning of overall banking trends.
Rising interest rates mean that it can charge higher rates for its loans, and its estimated yield for auto loans jumped from 7.15% last year and 7.07% in the 2022 first quarter to 7.82% in the 2022 second quarter. However, it also means the higher likelihood of defaults, and the bank increased its provisions for credit losses, which negatively impacts the bottom line. But aside from economy-driven results, the company is posting competitive results. In another example, return on common tangible equity was 23.2%, a figure higher than many other banks and and an indication that Ally generates strong earnings relative to its equity.
A top dividend
Finally, back to the dividend. Ally pays a growing dividend that yields a market-beating 3.7%. This dividend, coupled with Ally's performance, should put Ally on your watch list if you're looking to invest in dividend stocks.
