Ally Financial Inc. (NYSE:ALLY) has announced that it will be increasing its dividend on the 15th of November to US$0.25. This takes the annual payment to 1.7% of the current stock price, which is about average for the industry.
Ally Financial’s Payment Has Solid Earnings Coverage
Solid dividend yields are great, but they only really help us if the payment is sustainable. Ally Financial is quite easily earning enough to cover the dividend, however it is being let down by weak cash flows. We think that cash flows should take priority over earnings, so this is definitely a worry for the dividend going forward.
Looking forward, earnings per share is forecast to rise by 1.2% over the next year. If the dividend continues on this path, the payout ratio could be 14% by next year, which we think can be pretty sustainable going forward.
Ally Financial Is Still Building Its Track Record
The dividend’s track record has been pretty solid, but with only 5 years of history we want to see a few more years of history before making any solid conclusions. Since 2016, the first annual payment was US$0.32, compared to the most recent full-year payment of US$1.00. This means that it has been growing its distributions at 26% per annum over that time. It is always nice to see strong dividend growth, but with such a short payment history we wouldn’t be inclined to rely on it until a longer track record can be developed.
The Dividend Looks Likely To Grow
Investors could be attracted to the stock based on the quality of its payment history. It’s encouraging to see Ally Financial has been growing its earnings per share at 29% a year over the past five years. Earnings per share is growing at a solid clip, and the payout ratio is low which we think is an ideal combination in a dividend stock as the company can quite easily raise the dividend in the future.
Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. While the low payout ratio is redeeming feature, this is offset by the minimal cash to cover the payments. We would probably look elsewhere for an income investment.
Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. Case in point: We’ve spotted 2 warning signs for Ally Financial (of which 1 shouldn’t be ignored!) you should know about. If you are a dividend investor, you might also want to look at our curated list of high performing dividend stock.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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