It's tempting, to be sure. Ally Financial (ALLY 0.88%) shares are currently sporting a dividend yield of a little over 4.4%. If you've been shopping around for dividend stocks for a while, then you know that's above average right now.
Before you buy a stake in this online lender, though, there's something you ought to know. That dividend? It may not be quite as secure as it seems.
Ally's unbalanced business
On the off chance you're reading this and aren't aware, Ally Financial is an online bank. It offers all the basic retail banking services you'd expect from a local brick-and-mortar bank, including checking accounts, credit cards, and brokerage services.
Its big moneymaker, however, is lending -- automobile lending in particular. Of last year's total net revenue of over $8.4 billion (after removing its own interest expenses), $5.2 billion of it came from automotive financing. Of its total loan portfolio of $136.3 billion, $98.4 billion of it consists of car loans.
And that's a problem, given a couple of key details regarding the present economic backdrop.
While the economy may not be a disaster right now, a whole bunch of borrowers are suddenly behind on their car payments. In fact, 90-day delinquencies in the U.S. jumped to 3.89% during the first quarter, marking the largest quarterly increase in delinquencies since late 2019. In the meantime, total car-loan debt in the U.S. continues to march its way into record territory, reaching $1.56 trillion during Q1.
US Auto Loans Delinquent by 90 or More Days data by YCharts
The delinquency metrics are even more alarming for certain borrowers. Subprime borrower delinquencies reached record levels by the end of last year. Simultaneously, numbers from the Federal Reserve indicate that auto loan delinquencies among consumers under the age of 30 now stand at their highest levels since 2009, at nearly 4.6% of these loans.
It's not just souring automobile loans suggesting many consumers are struggling to pay all their bills, either. Total household debt reached a record $17.05 trillion during Q1, according to the Fed. Total delinquencies on these collective loans grew last quarter for the first time since the pandemic took hold, while 90-day credit card delinquencies themselves have risen from just a little over 3% of all accounts in the middle of last year to nearly 5% as of last quarter.
The kicker: Numbers from automobile market research outfit Edmunds indicate that among car shoppers who already own a car, they still owe roughly $5,300 on the vehicle they intend to trade in. That's almost 30% above the average negative equity from a year earlier.
Read between the lines. After months of persistent inflation and underemployment (relatively low wages), many Americans are one bad month away from outright default on at least one kind of loan. A car loan is often the easiest one to skip. Auto lenders are at grave risk here, even if it's not yet clear on their balance sheets.
Ally Financial is starting to show the predictable cracks
At least some credit is due. Ally Financial seems to be sidestepping the brunt of this headwind so far. Of its $84 billion auto loan portfolio, payments on $80.6 billion worth of them are still being made on time. Its borrowers' credit scores look about the same now as they did a couple of years ago, and much like they did even before the pandemic.
Even so, the company's starting to show some cracks. The first quarter's net automotive charge-offs of $351 million are well up from the year-ago comparison of $113 million, even though Ally's total auto loan portfolio only grew by about 6% during that time. That's also above Q1 2021's charge-offs of $97 million as well as pre-pandemic Q1 2020's comparable net charge-off figure of $262 million, when Ally's car loan portfolio was only about 13% smaller than it is now.
The point is, it's difficult to deny that Ally's ultimately running into the same headwind other lenders are, even if it's not running as quickly, or poised to run as deep into it as rivals.
That's a problem for current and would-be investors too, and dividend investors in particular. While Ally Financial is fully capable of supporting its current quarterly per-share payout of $0.30, the margin of safety is narrowing. Its first-quarter adjusted earnings per share of $0.82 fell dramatically from the year-earlier comparison of $2.03, extending a streak of shrinking profits.
Data source: Thomson Reuters. Chart by author.
And that's without yet seeing the full potential impact of the current wave of economic turbulence. In the absence of a dramatic improvement in domestic or intentional economic growth, the headwind that's starting to cause real problems for lenders (including Ally) could start taking even bigger bites out of their bottom lines.
Not worth the risk
None of this is a guarantee that Ally's dividend is in serious jeopardy. It's not even a suggestion that a dividend cut is in the cards.
But it should be a major concern all the same, particularly when there are so many other dividend-paying stocks out there that aren't on the verge of feeling such fiscal strain.
In other words, Ally Financial probably isn't the best dividend stock for you, or anyone else for that matter. It's a company that relies heavily on a brisk auto loan business in the midst of a strong economy, which isn't what we have right now.
