Warren Buffett’s investment career spans seven decades. At 91, his investment philosophies continue to guide Berkshire Hathaway (BRK.A 2.10%)(BRK.B 2.12%) at above-market returns. So when the Oracle of Omaha makes a move on an action, it’s a good idea to pay attention to it.
A recent regulatory filing, which shows shares Berkshire Hathaway bought and sold in the first quarter of 2022, revealed a new stake in an innovative digital bank Allied Financial (ALLY 3.20%). Berkshire bought 8.9 million shares, representing a 2.8% stake in the company, and the position is worth about $346 million at the current share price.
Here’s why investors should consider following Buffett’s lead on this stock.
America’s first digital bank
Ally Financial is different from traditional banks. Its presence is almost entirely online with no physical branches, making it well suited to today’s economic climate, in which consumers place a high value on convenience. The bank has 10.5 million customers in all business segments ranging from loans to insurance and investment services.
On the lending front, Ally has the largest auto loan portfolio in the United States with performing assets of $107.3 billion at the end of the first quarter. This segment has been volatile for the past two years as a shortage of new cars has hampered loan growth, but the company says consumer demand remains high and its origination yield above 7% indicates strength. persistent.
Ally added $2.1 billion in new auto loans for the quarter, and the segment generated $1.3 billion in revenue, representing 62% of the company’s total.
But the company’s mortgage segment is arguably the most exciting in terms of growth. Ally Home was established in 2017 and since then lending has skyrocketed.
Ally Home mortgages were $1.7 billion in the first quarter of 2022, reflecting some market weakness, likely due to the mortgage market pricing in much higher interest rates. The Federal Reserve raised the benchmark rate by 0.5 percentage points in May (which has a ripple effect on mortgage rates), and there’s likely more on the horizon.
However, even with slowing originations, Ally is steadily accumulating more loans held for investment each quarter, reaching an all-time high of $18.4 billion in Q1 2022. high quality with loan-to-value ratios below 60% and top FICO scores. 750, on average. Loans of this standard can be expected to be low risk and can generate reliable revenue for the business even in tougher economic times.
Return cash to shareholders
One of Warren Buffett’s favorite qualities in a business is his willingness to return money to investors, whether through dividends or stock buybacks. Ally Financial is doing both at record highs.
It paid an increased dividend of $0.30 per share in the first quarter and also announced that it would maintain the same payout in the second quarter. That dividend is 58% higher than the $0.19 per share it paid in the first quarter of 2021. Ally also repurchased $2 billion of its outstanding shares in 2021, more than the 1.6 billion dollars of redemptions that it had originally planned. And in 2022, management has pledged to buy back another $2 billion of stock. Reducing the number of shares on the market means that each remaining share represents ownership by a larger fraction of the company, making them organically more valuable.
Why Investors Should Follow Buffett in Ally
Ally Financial’s digital approach prepares it for growth. This greatly reduces the hassle that many consumers face when experiencing branch banking. It also makes banking accessible from virtually anywhere.
Additionally, Ally’s consistent focus on adding services and products has led to 52 consecutive quarters of customer growth. It now operates in 10 different product and service categories, and the percentage of its depository customers using an additional Ally product or service has more than quadrupled, from 2% in 2017 to 9%. industry, especially if it continues to operate exclusively in the digital sphere. This means Ally has much lower operating costs because it doesn’t have to maintain physical locations, and its convenience helps it attract younger customers; 70% of Ally’s new customers in the last quarter were millennials or younger.
The company also leads the industry in customer retention at 96%.
From a financial perspective, analysts expect Ally’s revenue and earnings to trend sideways until at least the end of 2023, but current levels remain very high compared to its pre- pandemic. The reason for the pause in growth can be attributed to the tightening of economic conditions, as over the past two years the US government and the Federal Reserve have flooded the economy with stimulus measures that have led to a spike in spending. and loans. This isn’t necessarily unique to Ally; it is also a reality for much larger banks.
In 2021, the company generated $8.4 billion in revenue, up 33% from 2019. Similarly, its earnings per share of $8.61 in 2021 was up 131% from compared to 2019. While results are expected to remain modest for this year and next, Ally is offering a dividend with an annual yield of 3.1% – a decent payment for investors waiting for the bank’s next stage of growth.
If Ally continues to add customers and expand its product line, it will set the company up for potentially significant long-term performance. And that long-term potential is one of the pillars of Buffett and Berkshire’s investment reputation and what has helped the company’s shares generate annualized returns of around 20% over the decades.