Warren Buffett, having transformed Berkshire Hathaway (BRK.A -0.28%) (BRK.B -0.68%) from a little-known textile maker to a name-brand multibillion-dollar holding company, is beyond doubt one of history's greatest investors.
He has a knack for picking quality companies and not overpaying for them. This is why checking out Berkshire Hathaway's latest major buys can serve as guidance for your own portfolio.
Buffett and company recently increased their position in the online bank Ally Financial (ALLY 0.13%) from just under 9 million shares to more than 30 million as of the second quarter. What was likely behind this move, and why should income and value investors consider buying Ally Financial for their portfolio? Let's dig in to find out.
A customer-centric company
Ally Financial offers a wide range of products and investment services to its customers. These include certificates of deposit, checking and savings accounts, and individual retirement accounts. The company also provides investors access to self-directed and managed investment products through its Ally Invest platform. Ally Financial also lends to customers for auto financing, new home purchases, and refinancing. Finally, the company offers commercial insurance and protection products for vehicle dealers and consumers.
In addition to Ally's customer-oriented approach to business, the company earns high marks from its retail customers. That's because Ally helps customers achieve financial well-being rather than just blindly selling them products, which is how the company has earned an 83% customer satisfaction rate.
This focus on the customer, above all else, has served Ally well. It helps explain why the company, which started in 1919 as General Motors' (GM -0.04%) financing division, now has 10.5 million customers and $186 billion in total assets as of June 30.
With more than a century of experience in its primary business of auto lending, arguably nobody does it better than Ally. The company's automotive finance business accounted for $600 million of its $780 million in second quarter core pretax income.
A near record-low supply of new cars and elevated new car prices are forcing consumers to rely more on auto loans to finance their car purchases. This is why Ally's consumer auto originations were $13.3 billion in the second quarter of this year, which was the highest quarterly origination rate since 2006. Given that these conditions probably will persist, the company's auto loan origination business could continue to benefit for the foreseeable future.
Image source: Getty Images.
The dividend is enticing
Considering the S&P 500 Index's 1.8% dividend yield, Ally's 4.2% yield is especially attractive in the current environment. And investors can sleep easy at night knowing that the payout is well-covered.
This is supported by the projection that Ally's dividend payout ratio will be just 16.5% in 2022. That builds in a large buffer to protect against a temporary decline in the company's earnings in the event of a severe and prolonged recession. And it also serves as a mechanism to allow Ally to resume generous dividend growth once the macroeconomic environment improves.
A reasonably valued stock
Ally is a solid business. And the stock is sensibly valued for its fundamentals.
In support of this argument, Ally is trading at a price-to-book (P/B) ratio of a bit less than 0.8. That's in line with the stock's 10-year median P/B ratio of 0.8, which is a decent value for a company whose fundamentals are as strong now as they have been in recent years.
