Analysts React To Huge Ally Financial Buyback

Ally Financial Inc ALLY shares traded higher by 1.3 percent Tuesday after the company announced a much larger than expected $1.25 billion 2019 buyback plan. Ally is not a Category IV bank this year and won't be subject to the annual CCAR by the Federal Reserve.

Ally’s $1.25 billion buyback is up 25 percent from a year ago and far exceeded expectations. At the stock’s current share price, a $1.25 billion buyback would reduce Ally’s outstanding shares (and boost its potential EPS) by more than 10 percent.

Wells Fargo Weighs In

Wells Fargo analyst Donald Fandetti said the new buyout plan coupled with the 17-cent dividend following a payout hike in January puts Ally at a slightly higher than 100 percent payout ratio. Payout ratio is a measure of how much of a company’s annual earnings are returned to shareholders.

“The strong buy­back should be viewed positively by investors,” Fandetti wrote in a note. “Similar to other consumer finance companies, investors have late cycle fears putting the shares at 0.95x Q4'18 adj TBV of $29.90 and 7.1x 2020 EPS estimates.”

Contrary to market fears, Fandetti says credit losses have been better than expected in recent quarters and should be flat in 2019 compared to last year. Wells Fargo has an Outperform rating and $30 price target for Ally's stock.

Morgan Stanley’s Take

Morgan Stanley analyst Betsy Graseck says Ally’s announced buyback was more than double her estimate of $560 million.

“Our $560M buyback estimate for 3Q19-2Q20 was largely based on our estimates for a $1.7B increase in loan loss reserves from CECL,” Graseck wrote in a note. CECL is a new banking accounting standard for credit losses that will go into effect this year.

“While ALLY’s press release says that today’s announced buybacks are subject to the impact of CECL, among other things, the announcement suggests they think the impact of CECL will be limited, or in any case, lower than the $1.7B we are looking for,” Graseck wrote.

Morgan Stanley has an Equal-Weight rating and $30 price target for Ally.

The stock traded around $28.49 per share at time of publication.

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