Ally Financial (NYSE:ALLY) Is Paying Out A Dividend Of $0.30

The board of Ally Financial Inc. (NYSE:ALLY) has announced that it will pay a dividend of $0.30 per share on the 15th of May. This means the annual payment is 3.0% of the current stock price, which is above the average for the industry.

See our latest analysis for Ally Financial

Ally Financial's Earnings Will Easily Cover The Distributions

Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained.

Ally Financial has a good history of paying out dividends, with its current track record at 8 years. Based on Ally Financial's last earnings report, the payout ratio is at a decent 49%, meaning that the company is able to pay out its dividend with a bit of room to spare.

The next 3 years are set to see EPS grow by 141.7%. Analysts estimate the future payout ratio will be 22% over the same time period, which is in the range that makes us comfortable with the sustainability of the dividend.

Ally Financial Is Still Building Its Track Record

The dividend's track record has been pretty solid, but with only 8 years of history we want to see a few more years of history before making any solid conclusions. The dividend has gone from an annual total of $0.32 in 2016 to the most recent total annual payment of $1.20. This implies that the company grew its distributions at a yearly rate of about 18% over that duration. The dividend has been growing rapidly, however with such a short payment history we can't know for sure if payment can continue to grow over the long term, so caution may be warranted.

Dividend Growth Is Doubtful

Investors who have held shares in the company for the past few years will be happy with the dividend income they have received. However, initial appearances might be deceiving. Ally Financial has seen earnings per share falling at 5.8% per year over the last five years. If earnings continue declining, the company may have to make the difficult choice of reducing the dividend or even stopping it completely - the opposite of dividend growth. Earnings are forecast to grow over the next 12 months and if that happens we could still be a little bit cautious until it becomes a pattern.

In Summary

In summary, while it's good to see that the dividend hasn't been cut, we are a bit cautious about Ally Financial's payments, as there could be some issues with sustaining them into the future. While Ally Financial is earning enough to cover the dividend, we are generally unimpressed with its future prospects. We would be a touch cautious of relying on this stock primarily for the dividend income.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. Taking the debate a bit further, we've identified 2 warning signs for Ally Financial that investors need to be conscious of moving forward. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.

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