Ready to buy the dip? This financial action is a smart choice

With the broader market trading in bear market territory in 2022, it’s no surprise to see many stocks trading way off previous highs. Some of these stocks reached unsustainable valuations in 2020 and 2021, and a decline was inevitable once economic conditions tightened.

Unfortunately, many solid and profitable companies with reasonable valuations have also seen their share prices fall in 2022, caught up in the massive sell-off. Fortunately, these are the stocks that smart long-term investors should focus on accumulating while their prices are temporarily reduced.

A solid business that has been caught in the sale is Allied Financial (ALLY -0.42%), a leading online bank with a leading presence in auto loans. The fintech stock has something to offer all types of smart investors: an above-market dividend, a mammoth share buyback program, an attractive valuation and an excellent return on equity (18%, close to the most raised in its eight-year history). ). It also has one of the smartest (and most successful) investors of all time, Warren Buffett, buying stocks.

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Buying Ally is like buying a $100 bill for $80

Ally shares are cheap after falling nearly 50% from 52-week highs, mainly on concerns about a looming recession and rising interest rates that could chill the auto loan market and expose some customers to the risk of default. The stock now trades at a price/earnings multiple of just 4, which is well below the overall market average even after the 2022 market sell-off, as well as below that of many banking industry peers. .

An assessment of the price-to-book (P/B) ratio offers further proof of what a cheap Ally stock is right now. Ally trades at a P/B ratio of just 0.8. Book value is simply the sum of a company’s assets minus its liabilities, and P/B is one of the primary metrics used to value bank stocks. AP/B of 1.0 means a stock is trading at the same level as the value of its assets, with no further value given for growth prospects. An AP/B of less than 1 means the stock is worth less than the company’s assets. This suggests that the market is currently valuing Ally at a lower price than the shares would be worth if the company were to liquidate.

The low P/B ratio gives investors a considerable margin of safety with Ally today. Buying stock at 0.8 times book value can be thought of as similar to buying a $100 bill for $80, and it’s a winning trade most people would make every time.

Ally Financial is a monster of shareholder return

There’s a lot more to love about the action than just its compelling valuation. The bank continues to increase its dividend, and it is now yielding over 4%. It increased its quarterly payout from $0.25 per share to $0.30 this year, and the annual dividend of $1.20 per share is now more than double what it was in 2018 when the stock sold. paid $0.56 for the year. A low dividend payout ratio means that this $1.20 figure looks sustainable and Ally should be able to gradually increase it over time, with earnings per share of $6.93.

That growing and sustainable dividend is a compelling reason to own Ally, but its massive stock buybacks are perhaps an even bigger reason. Management implemented a $2 billion share buyback program. It repurchased $584 million worth of shares in the first quarter and $600 million in the second quarter of this year. That’s a significant amount of stock taken off the market for a company with a market capitalization of just over $9 billion.

Share buybacks are a boon for shareholders. They increase earnings per share, improve return on equity, and even increase dividends per share because there are fewer shares outstanding.

Buffett buys

Back to Warren Buffett. Public records show that Buffett Berkshire Hathaway (BRK.A -0.83%) (BRK.B -0.40%) initiated a position in Ally Financial during the first quarter of 2022. Berkshire then increased its position by 234% during the second quarter and now owns 30 million shares.

The public filings for Q3 will trickle down over the coming weeks, and with the stock now trading below what Buffett added in Q2, it wouldn’t surprise me to see that he has again increased its position in the third quarter. now that stock looks even more like a bargain.

Is it time to buy the dip on Ally?

Ally Financial looks like a smart stock to buy lower right now. It trades at a significant discount to its book value, giving investors a margin of safety. The bank regularly buys back shares and increases its dividend, which now yields more than 4%.

Add to that the fact that it caught the eye of a savvy investor like Warren Buffett, who is known for his expertise in banking stocks, and Ally looks like a good long-term buy.

Ally is an advertising partner of The Ascent, a Motley Fool company. Michael Byrne has no position in any of the stocks mentioned. The Motley Fool holds positions and recommends Berkshire Hathaway (B shares). The Motley Fool recommends the following options: $200 long calls in January 2023 on Berkshire Hathaway (B shares), $200 short puts in January 2023 on Berkshire Hathaway (B shares) and short calls of $265 in January 2023 on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

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