Ally Financial Inc., a digital financial-services company, provides various digital financial products and services to consumer, commercial, and corporate customers primarily in the United States and Canada. Let's review how Ally fares when tested against the factors for choosing defensive stocks that Ben Graham laid out in Chapter 14 of The Intelligent Investor:
The Company Should Trade at a Fair Price
Here we use the “Graham number” to calculate the fair price of a stock. The Graham number is the square root of (22.5 x earnings per share x book value per share), which for Ally Financial gives us a fair price of $67.41, compared to the stock’s market price of $26.05. Ally Financial’s fair price is -61.4% below its market price, which implies that there is upside potential -- even for a conservative investors who require a significant margin of safety.
Sales Revenue Should Be No Less Than $100 million.
For Ally Financial, average sales revenue over the last few years has been $6,790,500,000.00, so according to the analysis the stock has impressive sales revenue.
Current Assets Should Be at Least Twice Current Liabilities.
Ally Financial’s current liabilities ($142,972,000,000) are greater than its current assets ($7,696,000,000) — its current ratio is only 0.05. Current assets refer to company assets that can be transferred into cash within one year, such as accounts receivable, inventory, and liquid financial instruments. Current liabilities, on the other hand, refer to those that will come due within one year. We note, however, that as a financial institution, it stands to reason that current liabilities will usually outstrip current assets.
The Company’s Long-term Debt Should Not Exceed its Net Current Assets
This means that its ratio of total outstanding debt ($17,025,000,000) to net current assets should be between 0 and 1. Since Ally Financial’s debt ratio is -0.1, the company's net current assets are insufficient to cover its debt. We calculate net current assets as current assets minus current liabilities.
The Stock Should Have a Positive Level of Retained Aarnings Over Several Years.
In Ally Financial’s case, the retained earnings have averaged -$3,855,750,000.0 over the last 4 years. Retained earnings refer to the net income left for equity investors after all expenses have been accounted for, including dividends. It's a similar metric to free cash flow, with the difference being that earnings are calculated on an accrual, as opposed to a cash basis. In other words, earnings don't represent actual cash -- only evidence that the company can or will receive income based on its sales.
For comparison, here are Ally's cash flows of the last four years:
| Date Reported | Cash Flow from Operations ($) | Capital expenditures ($) | Free Cash Flow ($) | YoY Growth (%) |
|---|---|---|---|---|
| 2021-12-31 | 4,042,000,000.0 | -5,120,000,000.0 | -1,078,000,000.0 | -85.54 |
| 2020-12-31 | 3,739,000,000.0 | -4,320,000,000.0 | -581,000,000.0 | -2251.85 |
| 2019-12-31 | 4,050,000,000.0 | -4,023,000,000.0 | 27,000,000.0 | -93.88 |
| 2018-12-31 | 4,150,000,000.0 | -3,709,000,000.0 | 441,000,000.0 | n/a |
There Should Be a Record of Uninterrupted Dividend Payments Over the Last 20 Years.
Ally Financial has returned an average dividend yield of 2.37% over the last five years, and has regularly offered dividends since 2016.
The Company Should Have a Minimum Increase of at Least One-third in Eps Over the Past 10 years.
Ally hasn't been around for 10 years, but since its period of negative earnings post IPO, it has logged positive Eps numbers that are on a steady growth path.
Based on the above analysis, we can conclude that Ally Financial does not have the profile of a defensive stock according to Benjamin Graham's criteria. Remember that the above analysis is intended to ensure that investors are not overpaying for a stock. It could still turn out to be a good investment — it just doesn't offer the margin of safety that Graham was looking for.
