Ameriprise: Long-Term Buy Despite Recent Stock Run-Up

Jul.24.14 | About: Ameriprise Financial, (AMP)

Summary

Ameriprise is among the largest asset managers with nearly $800 billion in AUM and a network of approximately 10,000 financial advisors.

Although shares have climbed nearly 150% over the last two years, AMP’s top and bottom line growth since the Great Recession support its premium valuation.

With a growing dividend and several share repurchase programs over the years, AMP’s management team is shareholder-friendly.

Ameriprise Financial, Inc. (NYSE:AMP) is a diversified financial services company that provides a range of financial products and services in the United States and internationally. The company's principal brands include Ameriprise Financial (i.e. advisor network providing financial planning, investment advisory and retail brokerage services); Columbia Management and Threadneedle (international division), which provide asset management products and services (retail and institutional); and RiverSource, which provides annuity and protection products, including life and disability income insurance products.

PROS:

Ameriprise currently has a network of approximately 10,000 financial advisors - one of the largest - which provide a significant wealth management opportunity as the demand for financial advice is expected to increase due to a variety of factors, such as the retirement of baby boomers and the rise of the millennial generation who are expected to control over $9 trillion in assets by 2018. In addition, although there is still some element of distrust surrounding financial markets following the Great Recession, the recent financial crises are ultimately expected to increase demand for financial advice.

Since its spin-off from American Express in 2005, AMP has started to transition away from the life insurance and annuity business in favor of wealth planning and asset management services. Through its purchase of Columbia Management (and its international arm Threadneedle) in 2010, AMP significantly expanded its asset management capabilities on a global scale to become a major player in the asset management industry.

In recent years, the Advice and Wealth Management and Asset Management segments have accounted for more of the company's revenue than in the past (when compared to their annuities and protection, or life insurance, segments). In 2013, 61% of the company's revenues came from the former - up from 58% in 2011. Further, AMP's Advice & Wealth Management segment is growing faster than its Asset Management segment, while its Annuities segment is losing ground quicker than its Protection segment.

Revenue Breakdown by Segment Q1 2014 2013 2012 2011
Advice & Wealth Management 36.4% 35.1% 34.0% 32.8%
Asset Management 25.6% 25.9% 25.4% 25.6%
Annuities 20.2% 21.1% 22.1% 23.2%
Protection 17.6% 17.9% 18.3% 18.3%
Corporate & Other 0.2% -0.1% 0.2% 0.0%
Total 100.0% 100.0% 100.0% 100.0%
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Source: AMP Form 10-K (31 December 2013) and Form 10-Q (31 March 2014)

In addition, AMP's operations have become more efficient over the years. For example, the company's return on equity (ROE) from continuing operations, excluding accumulated other comprehensive income (AOCI), grew from 12.8% to 17.2% YoY in 2013, while operating ROE, excluding AOCI, grew from 16.2% to 19.7% YoY in 2013. In Q1 2014, these numbers grew even further to 18.2% and 20.8% YoY, respectively.

Moreover, since 2009, AMP has made tremendous strides on both the top and bottom lines, growing net revenues and net income by an average of 11.4% and 22.7% each year, respectively. Further, the company managed to grow net profit margin from 8.6% in 2009 to almost 12% in 2013. Over the same time period, earnings per share (EPS) grew about 150% cumulatively from roughly $2.60/share to around $6.50/share.

in millions, except per share amounts 2013 2012 2011 2010 2009
Net Revenues $11,199 $10,217 $10,192 $9,512 $7,397
Net Income $1,334 $1,029 $1,116 $989 $634
Net Profit Margin 11.9% 10.1% 10.9% 10.4% 8.6%
Net Revenue Growth 9.6% 0.2% 7.1% 28.6%
Net Income Growth 29.6% -7.8% 12.8% 56.0%
EPS Basic $6.56 $4.70 $4.62 $3.84 $2.61
EPS Diluted $6.44 $4.62 $4.53 $3.77 $2.59
Cash Dividend $2.01 $1.15 $1.15 $0.71 $0.68
EPS Growth (Basic) 39.6% 1.7% 20.3% 47.1%
EPS Growth (Diluted) 39.4% 2.0% 20.2% 45.6%
Dividend Growth 74.8% 0.0% 62.0% 4.4%
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Source: AMP Form 10-K (31 December 2013)

Furthermore, it is also because of shareholder-friendly programs such as stock buybacks and growing dividend payments that investors in AMP should be optimistic going forward. For example, the company has a history of buying back its own stock, which continued in April 2014 when its current $2 billion share repurchase program (authorized in October 2012) was extended for an additional $2.5 billion through April 2016. Not only that, but the company has increased its dividend payment almost 200% since 2009 from $0.68/share to $2.01/share in 2013.

RISKS:

The company is heavily impacted by financial markets and macroeconomic activity on several fronts. For example, a significant portion of revenues in the Advice and Wealth Management segment is fee-based and driven by the level of client assets, which is impacted by both market movements and net asset flows. In addition, as equity markets have risen, assets under management (AUM) have risen as well. However, the reverse is true if equity markets take a step back. In fact, as of the end of Q1 2014, the company's Asset Management segment was comprised mostly of equity investments (approximately 55%).

Meanwhile, considering fixed income investments accounted for about 39% of the company's Asset Management segment as of March 31, 2014, Ameriprise also is subject to interest rate fluctuations. Further, prolonged periods of low interest rates, such as the current interest rate environment, could adversely affect the firm's financial condition, as the company is not able to earn a more profitable spread on its assets and investments. However, as rates start to rise again, the firm should benefit as they can offer higher rates on interest-sensitive products such as fixed universal life insurance, fixed annuities and face-amount certificates, while also offering more competitive rates relative to peers.

Furthermore, AMP's increasing expenses amid the current low interest rate environment are somewhat worrisome. Some of these rising expenses include the increased signing bonuses for new advisors that were recently raised to 150% of an advisor's last 12 months of revenue (up from 120%) for those producing more than $585,000.

The company also is subject to intense competition from other broker-dealers, banks, asset managers, insurers and other financial institutions. Specifically, AMP competes on a variety of levels, including, but not limited to, increasing its customer and overall asset base, attracting and retaining talented employees, and offering favorable and innovative investment products and advisory services.

Additionally, some of AMP's investment portfolio is invested in relatively illiquid securities (i.e. privately placed fixed income securities, mortgage loans, policy loans, and limited partnership interests), which accounted for about 18% as of December 31, 2013.

OTHER IMPORTANT ASPECTS TO NOTE:

Recently, AMP has continued to grow AUM among its key segments (Advice and Wealth Management and Asset Management), mostly due to an increase in wrap account net inflows and market appreciation. As equity markets have risen dramatically since the end of the Great Recession, the latter has been the primary driver of this growth. As of March 31, 2014, total AUM grew 11% YoY to roughly $783 billion.

As illustrated in the company's most recent SEC filings, AMP's actual capital more than adequately satisfies the regulatory capital requirements for its wholly owned subsidiaries.

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Source: AMP Form 10-K (31 December 2013)

As of March 31, 2014, AMP's fixed maturity securities comprised roughly 85% of the company's total investments with only 6% rating below investment grade. The remaining 94% was broken up by AAA, AA, A and BBB as 25%, 6%, 22% and 41%, respectively.

Meanwhile, the company's biggest concentrations of credit risk related to commercial mortgage loans (by region in the US) are in the Pacific and South Atlantic, which account for 25% and 27%, respectively. The next largest include the East North Central and Mountain regions at 9% each. Meanwhile, retail and office loans account for the biggest percentages by property type at 35% and 21%, respectively.

Internationally, AMP's European debt exposure was approximately 5% as of December 31, 2013, with less than 1% of that amount in the PIIGS countries - none of which were in the countries of Greece or Portugal.

Although the company's pension plan is currently underfunded, its funded status improved somewhat in 2013 relative to 2012. For example, in 2012, the plan was underfunded by $206 million, but in 2013 it was underfunded by $132 million.

BOTTOM LINE:

Ameriprise currently trades at a premium to its long-term average on a variety of valuation metrics - mostly due to the nearly 150% increase in share price over the last two years. However, compared to the asset management industry and the majority of its peers, shares still appear somewhat undervalued. Given the company's impressive earnings results, favorable asset mix, and considerable exposure to the growing wealth management and asset management segments, shares of AMP should continue to do well. Further, AMP's shareholder-friendly management team, through its share repurchase programs and increasing dividend payouts, also bode well for current and future shareholders. As such, it should not be difficult to see why shares of AMP should trade at a premium, and therefore will likely continue to grow - especially as equity markets continue their ascent.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.