Berkshire Hathaway (BRK.A 1.08%) (BRK.B 1.14%) is a renowned conglomerate that has delivered impressive capital growth over multiple decades, thanks to Warren Buffett's exceptional skill in finding and investing in undervalued businesses. Many investors look to Berkshire Hathaway's stock portfolio as a top source of ideas for long-term capital growth.
One of the fairly recent additions to Berkshire Hathaway's portfolio that intrigued me was Ally Financial (ALLY 1.27%), the world's leading digital-only bank and a top provider of auto insurance and financing. At first glance, Ally didn't seem to match the typical profile of a Warren Buffett stock, based on a superficial assessment of its financials, dividend policy, and competitive position.
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However, after digging deeper, I realized that Ally is indeed a dyed-in-the-wool Buffett stock. Here's what the market is missing about this digital banking, lending, and insurance company.
Ally fails to meet Buffett's key criteria -- at least superficially
Ally does not seem like a typical Berkshire Hathaway holding. The company operates in a highly competitive industry, where it faces many rivals who are also expanding their online presence. Buffett likes to invest in businesses that have a strong competitive moat, which means they can protect their market share and profits from competitors.
However, Ally does not have a clear advantage over its peers, according to Morningstar, a leading financial services firm, which rates it as a "no moat" company. Therefore, Berkshire's nearly 9% stake in the digital banking firm is somewhat surprising.
Moreover, Ally does not stand out in terms of its valuation or dividend policy. The company's price-to-book ratio is fairly average compared to other U.S. banks (see graph below). Its annualized dividend yield of 3.25% and payout ratio of 40.1% are also in line with its industry average.
ALLY Price to Book Value data by YCharts
Finally, Ally does not have a consistent track record of increasing its dividends to shareholders, which is another quality that Buffett values highly. The company started paying dividends in 2016 and has achieved an impressive dividend growth rate of 20.1% since then. However, its dividend increases are irregular and large when they occur.
Aside from its high dividend growth rate, Ally does not meet most of the criteria that Buffett looks for in an investment.
Then I became an Ally customer
My switch to Ally was motivated by Berkshire Hathaway's investment in the online bank. I opened a spending account with Ally about four months ago and I was impressed by their services. I now have a savings account, a CD, a brokerage account, and I'm planning to make Ally my primary financial institution. I'm very satisfied with Ally as a customer, to put it mildly.
How? Ally's vision is to "Do It Right." I used to think that these kinds of vision statements were meaningless and hollow. But Ally has proven me wrong by delivering on this core value in my short time with them as both a banking and investment customer.
My wife and I now benefit from getting our ACH deposits two days early, automatic payment reversals on accidental double charges by merchants, and a smooth app experience across our different account types.
And apparently, we are not the only ones impressed by Ally's customer-friendly culture. The company has a stellar 97% retention rate and the number of customers who have a multi-product relationship with Ally has nearly tripled since the second quarter of 2019.
Why I plan on buying Ally stock
My opinion is that Ally has a strong competitive advantage in customer experience that is not reflected in its current valuation by Wall Street analysts. To wit, the stock is currently viewed as "fairly valued", per Wall Street's consensus estimate.
NYSE: ALLY
Key Data Points
I have been a customer of various banks, both large and small, as well as credit unions for the past 30 years. None of them can match Ally's digital banking platform, app, and investment platform in terms of quality and convenience, in my opinion.
Now, I am not familiar with Ally's other major business segments like auto financing, so I cannot comment on those at this time. However, I assume that Ally's culture of excellence applies to these operations as well, which gives it a sustainable edge over its competitors.
In all, Ally's customer experience is what sets it apart from other financial institutions-making it a great value stock in the Buffett style, and one that I plan on aggressively buying over the next several months. Even if the stock falls in response to a cooling auto market, after all, Ally's customer-friendly culture should shine through over the long term.
