ASX code: AMP
Share price: $5.37
Forecast FY2016 dividend: 30c
AMP is one of the largest domestic independent wealth management companies. It has been operating for more than 160 years and has operations in superannuation and investment, insurance, financial advice and banking.
Earnings are well diversified. Wealth management contributes about 40 per cent to earnings (excluding investment income). Wealth protection contributes 18 per cent, AMP Capital Funds Management 13 per cent, AMP Bank 10 per cent, and New Zealand financial services 11 per cent. The remainder of AMP’s earnings are generated from products in run-off.
AMP recently reported full- year 2015 results. Underlying profit increased by 7 per cent to $1.12 billion, driven by reasonable FUM (funds under management) inflows, performance fees from AMP Capital and reasonable earnings from AMP Bank. These results were assisted by the delivery of an efficiency program that brought improvement in the cost to income ratio to 43.8 per cent.
Further benefits are to be realised this year.
The underlying return on equity of AMP increased to 13.2 per cent. AMP declared a final dividend of 14c, an increase of 4 per cent compared to the 2014 final dividend and the bank has revised further its dividend policy to a target of between 70 and 90 per cent of underlying profits.
It is widely anticipated that the pool of assets in the domestic superannuation systems is expected to grow strongly as a result of the ageing demographic. Industry forecasters expect a 7 per cent annual growth over the next 10 years. Growth is unlikely to be in a straight line.
Volatility has caused the share prices of financial services businesses fall as investors contemplate the impact of lower asset prices and possible fund outflows on the revenues and profitability of fund managers.
AMP has the largest network of financial advisers, about 4400 aligned and employed, in Australia and New Zealand.
There is less downside risk to revenues, given the nature of the relationship between the financial adviser and the customer.
Though currently trading at or around our assessment of fair value, AMP trades at an attractive dividend yield of 5.6 per cent (partially franked to 85 per cent) based on current consensus and is well positioned to capitalise on the ageing population while limiting exposure to the volatile equity markets.
Stephen Wood is a senior analyst at Clime Investment Management.
ASX code: AMP