Ally Financial (ALLY 0.41%) stock went largely unnoticed by the investing community until Warren Buffett and his team at Berkshire Hathaway bought it sometime in early 2022. Buffett has a knack for choosing incredible stocks, and Ally is now on the savvy investor's radar.
Ally stock is actually down since Buffett bought it, falling 20% since Berkshire likely first took a position. It wasn't a great time for bank stocks as inflation soared and interest rates were rising. But Ally has done well since investor sentiment toward bank stocks started to rebound, and it's up about 70% during the past year. It's still not yet back to where it was when Buffett identified it as a stock to own, leaving plenty of room for investors to still buy in. But should you? Let's see where investors can expect it to be in three years.
The most important piece: The digital format
There are various features that distinguish banks from each other, even though they often appear very similar. Sometimes it's just who has a branch closest to your house. These days, customers have the luxury of searching online for the best rates. They're not usually looking at the bank's returns on equity, like investors do. But investors should pay attention to what customers are looking at, because that can determine which banks are stepping into opportunities, and which ones are missing them.
Ally's recent results are on par with most of the banking industry, which is dealing with higher defaults and other effects of high interest rates. It's also well positioned for the future, more than other banks. That's because it's winning new customers through its digital format and strong consumer focus.
Ally is all-digital and has no physical branches. Instead, it offers an easy-to-use digital interface and is the top all-digital bank in the U.S. Mobile banking will likely keep growing, and digital banking users are expected to increase from 208 million in 2023 to 216.8 million in 2025, according to Statista.
Ally is getting a lot of those customers. It added 3 million new ones in the 2023 fourth quarter, a 13% increase over last year, and $4.6 billion in retail deposits for a total of $142.3 billion. Ally is well positioned to expand because customers are attracted to its robust financial services app. In three years, it should have millions more customers and higher deposits. With a stronger economy, it should be reporting higher net income and better return on equity.
Still the leader in the auto finance industry
Even under today's less-than-ideal circumstances, it's also delivering strong results in its auto lending segment, which was its original business before it was separated from General Motors. It's the top prime auto lender in the U.S., with almost 22,000 dealer relationships. Since it has a long history of data in this segment, it has been able to generate strong consumer interest in car loans and price them efficiently in the high interest rate environment. It had 13.8 million car loan applications in 2023, a five-year high, with a 30% approval rate, a five-year low. It originated $9.6 billion in auto loans, on par with past years.
Cheap price, high dividend
Ally stock trades at a price-to-book ratio of just over 1. At this valuation, the stock isn't the same bargain it was last year, when it was well below 1. But it's still trading at a lower multiple than many other bank stocks. The valuation is likely to increase when Ally is in a better overall financial position, and that could happen quickly if the Federal Reserve cuts interest rates as expected later this year.
At the current price, the dividend yields 3.2%, which is also lower than last year but still more than double the average S&P 500 yield.
In three years, Ally should have a bigger business, with more customers and deposits. It should have a higher return on equity and increasing profits, and shareholders are likely to be rewarded.
