Published on June 26th, 2022 by Felix Martinez
Berkshire Hathaway (BRK.B) has an equity investment portfolio worth more than $360 billion as of the end of the 2022 first quarter.
Berkshire Hathaway’s portfolio is filled with quality stocks. You can ‘cheat’ from Warren Buffett stocks to find picks for your portfolio. That’s because Buffett (and other institutional investors) are required to periodically show their holdings in a 13F Filing.
You can see all Warren Buffett stocks (along with relevant financial metrics like dividend yields and price-to-earnings ratios) by clicking on the link below:
Note: 13F filing performance is different than fund performance. See how we calculate 13F filing performance here.
As of March 31st, 2022, Buffett’s Berkshire Hathaway owned just over 8.9 million shares of Ally Financial (ALLY), for a market value exceeding $315 million. Ally Financial currently constitutes over 0.1% of Berkshire Hathaway’s investment portfolio.
This article will analyze this consumer finance company in greater detail.
Ally Financial provides financial services to consumers, businesses, automotive dealers, and corporate clients. Its segments include Automotive Finance Operations, Insurance Operations, Mortgage Finance Operations, and Corporate Finance Operations. Its services include term loans, lines of credit, fleet financing, vehicle financing, commercial insurance products, etc. Ally Financial also has a held-for-investment consumer mortgage finance loan portfolio with mortgages originated by third parties. The company was founded in 1919 and is headquartered in Detroit, MI.
The company currently has a market capitalization of $10.8 billion. Ally has been growing its dividend for seven consecutive years and has a dividend yield of 3.4%.
On April 14, 2022, the company reported first-quarter results. GAAP earnings were $2.03 for the quarter, which beats estimates by $0.12. However, in the first quarter of 2021, the company earned $2.09 per share. Thus, earnings were down 2.9% year-over-year.
Revenue was up year over year from $1.94 billion in the first quarter of 2021 to $2.14 billion, an increase of 10.3%. The bank segment had 2,5 million retail depositors for the quarter, which grew 8% year-over-year with a retail deposit of $136 billion, up 6% compared to the first quarter of 2021.
Source: Investor Presentation
The company has improved its net margin considerably since 2014. In 2014, the net margin was under 13% for the year. Now net margin is over 20% for the past three years and up to 34% in 2021. This is due to improving its efficiency, leading to more substantial margins, which will allow them to capitalize on revenue increases. We are forecasting 3% earnings-per-share growth annually moving forward.
Another earning growth driver will come from share buybacks. The company has a $2 billion buyback program for 2022. The company has already repurchased 13 million shares in 1Q.
Since the stock price looks undervalued, this will help earnings grow for the foreseeable future.
Source: Investor Presentation
Competitive Advantages & Recession Performance
There is no competitive advantage for the company as hundreds of banks offer the same kind of services that Ally offers. However, the company does do well with marketing and enticing new customers to its services with lower interest for loans and higher interest for savings accounts.
Ally did not perform well during the Great Recession, as the company needed a bailout. Following the bailout, the company went public again in 2014. Luckily, another crisis with the dimensions and the focus on financials like the one from 2009 is not overly likely in the foreseeable future, so investors do not have to worry about bankruptcy at this point. Still, the coronavirus crisis shows that Ally Financial’s business is vulnerable to downturns, as credit losses during 2020 were above the norm.
Valuation & Expected Returns
For 2022, we expect the company to earn $7.80 per share. This will be down 9.4% compared to 2021. However, it is much higher than what the company earned in 2020 when it earned $3.03 per share.
At the current price, the company has a PE of 4.5X earnings. This is very attractive because the company PE has had an average of 8.9X earnings for the past five years.
This provides a substantial tailwind in valuation expansion. Also, the company dividend yield is higher than its five-year average of 2.2%. Overall, the company is undervalued with the potential of high double-digit returns over the foreseeable future.
Ally Financial is an undervalued stock today, both on a price-to-earnings and a dividend yield basis. Additionally, we expect low earnings growth in the years ahead. The company’s dividend yield is also higher than in the past at 3.4% today and is double what the broad market S&P 500 index offers.
Given all this, ALLY offers good total return prospects in the next few years. Thus, we rate the company as a buy.
Other Dividend Lists
Value investing is a valuable process to combine with dividend investing. The following lists contain many more high-quality dividend stocks:
- The Dividend Aristocrats List is comprised of 65 stocks in the S&P 500 Index with 25+ years of consecutive dividend increases.
- The High Yield Dividend Aristocrats List is comprised of the 20 Dividend Aristocrats with the highest current yields.
- The Dividend Achievers List is comprised of ~350 stocks with 10+ years of consecutive dividend increases.
- The Dividend Kings List is even more exclusive than the Dividend Aristocrats. It is comprised of 38 stocks with 50+ years of consecutive dividend increases.
- The High Yield Dividend Kings List is comprised of the 20 Dividend Kings with the highest current yields.
- The Blue Chip Stocks List: stocks that qualify as Dividend Achievers, Dividend Aristocrats, and/or Dividend Kings
- The High Dividend Stocks List: stocks that appeal to investors interested in the highest yields of 5% or more.
- The Monthly Dividend Stocks List: stocks that pay dividends every month, for 12 dividend payments per year.
- The Dividend Champions List: stocks that have increased their dividends for 25+ consecutive years.
Note: Not all Dividend Champions are Dividend Aristocrats because Dividend Aristocrats have additional requirements like being in The S&P 500.
- The Dividend Contenders List: 10-24 consecutive years of dividend increases.
- The Dividend Challengers List: 5-9 consecutive years of dividend increases.