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Is Ally Financial Going to Initiate Dividends & Share Buyback?

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We can expect a capital deployment plan from Ally Financial Inc. (ALLY - Free Report) anytime soon. Several companies have similar programs; so what’s unusual about it?

Ally Financial, previously the consumer unit of General Motors Company (GM - Free Report) , has received approval from the Federal Reserve to redeem preferred shares sold during the 2008 financial crisis. The company will be buying back nearly 1.28 million remaining Series G shares for $1,000, plus all accrued and unpaid dividend, for a total consideration of $1.3 billion on Dec 14, 2015.

Apart from lowering the preferred dividend burden, this will help the company enhance its shareholders’ value through dividend payments and share repurchases. The terms of Series G Preferred Stock had barred Ally Financial from returning capital to its shareholders. In Apr 2015, the company had redeemed approximately 50% of Series G preferred shares.

Ally Financial’s CEO Jeffrey Brown said, “Addressing this remaining legacy security will remove the restriction the company had on offering common equity distributions and position Ally to meet its objective of initiating a dividend and share repurchase program in 2016.”

Nonetheless, Ally Financial will require the Fed’s approval before announcing any such plan. Notably, the company had finally cleared the 2015 stress test after failing it in the past years. Given its strong capital position, we believe the company will be able to clear the stress test in the next year, thereby securing approval for its 2016 capital deployment plan.

With an improved economic environment and enhancement in disposable income as well as consumer spending, Ally Financial is expected to benefit from the further rise in demand for auto finance. Also, the company’s efforts to contain expenses will aid its bottom-line growth. However, a strained top line remains a major concern.

Currently, Ally Financial carries a Zacks Rank #3 (Hold). Better-ranked finance stocks include Cash America International, Inc. and Flagstar Bancorp Inc. (FBC - Free Report) , both sporting a Zacks Rank #1 (Strong Buy).

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