Ameriprise Financial (AMP) is an asset manager with more than $900 billion in AUM or assets under management. The company continues to perform exceptionally well through its network of financial advisors that operate under the Ameriprise name. Compared to peers the company trades at quite a discount. The shares now offer an attractive entry point for enterprising investors willing to wait for the fair value to be met. Additionally, shareholders will be rewarded with a healthy dividend that has been rising and is plenty secure. I have started a position with the recent pullback as I believe shares are now priced attractively considering the limited risk in its business.
Ameriprise reported results in the most recent quarter that beat on both the top and bottom lines.
Source: Seeking Alpha
The company posted strong results with revenue growing 9.3% year over year thanks in part to strong performance in the management and advise division along with growth in all the other divisions.
Below we can see that so far for the nine months ended in 2018 the company is performing great.
Revenues have grown 7.8%, while earnings have grown 26.3%. The continued execution by management should give investors confidence that the recent sell off is offering an opportunity and is due to general market weakness not company specific weakness. The balance sheet continues to remain strong as well.
The company has close to $2.4 billion in cash on hand with long term debt slightly above that at $2.87 billion. Knowing the company is not over levered and has a manageable debt load is increasingly important in a rising rate environment. It also provides confidence that the company can continue to operate in a recessionary cycle as it has more than enough cash flow to continue to fund operations without using cash on hand. The company has produced over $1.1 billion in cash flow for 2018 so far and has used much of this to return capital to shareholders. In fact the company has repurchase close to $1.2 billion worth of shares this year.
In the last 2 years shares outstanding have been reduced by more than 22%. At the quarter end the company had just over 139 million shares outstanding. Investors should take notice that they have become a larger owner of the company and are benefiting from the strong cash flows the company produces. With continued share repurchases coming at a time during share price weakness offering further strong return on capital for shareholders the prospects look positive.
As far as we can see the decline in share price is not related to under performance by the company itself. It continues to grow its network of advisors adding another 87 for the quarter to almost 10,000 advisors. As it continues to bring on more financial advisors its asset base will grow and its earnings stream along with it. Investors should be mindful of this metric as it can signal how well the company will do in the future. Next, we take a look at valuation to see where the company currently stands.
Ameriprise pointed out earlier this year that the company trades at a discount to peers.
Source: Investor Presentation
At this time the company had a market cap that was about 15% higher than today's market capitalization of $16.9 billion. The company identified that if it were to trade in line with peers it would have a market cap of close to $32 billion or about $230 a share. This is roughly 90% higher than where shares trade at today implying significant upside potential. But is Ameriprise right?
Well compared to some peers in the same business it looks like Ameriprise may be undervalued. The forward P/E being lower than almost everyone except Principal Financial (PFG), as well the company has a higher yield than everyone except PFG. Once more it comes ahead when looking at P/S. So it appears that Ameriprise was correct in being quite a bit behind in valuation compared to peers.
Looking at valuation compared to its trading history we see shares are depressed at current levels.
The company trades at a lower P/E, P/CF, PEG, and P/S ratio compared to its 5 year history. Along side this it also offers a higher earnings yield and lower price to forward earnings ratio. It appears there hasn't been a cheaper share price from a fundamental standpoint to own shares than now.
Looking at owning shares from a historical yield perspective we see now is an opportune time as well.
Shares currently yielding close to 3% which has only happened 7.7% of the time in its trading history since 2005. This yield is close to the yield seen in the Great Recession, yet the economy is not facing any recession at this time. The dividend has also been growing with 13 years of uninterrupted raises at an average growth rate for the last 5 years of 17.7%.
Investors should continue to expect enhanced returns of capital as the operation grows. An increased dividend stream is always welcomed of course by myself and others.
Looking at the DCF value, we see the following.
Even with a lowly estimated 7% growth for the next 3 years and 5% there after shares have a DCF of $277.76. This is remarkable considering the company has plenty of room for growth with the largest generation of Americans entering the phases in which they would begin to plan for retirement. The company stands to benefit from years of tailwinds as it sees the generational shift continue to its favor.
The company expects investable assets to double in the next 15 years making the company the obvious beneficiary of such an event.
It appears that with tailwinds at its back and a depreciated valuation compared to peers that AMP is an opportune buy. The company also has identified opportunities in Europe to expand operations and benefit from the growing number of assets there. With such an excellent and well run operation it seems like it has been unfairly punished with the rest of the market.
Investors looking for investments that offer a significant potential return due to recent market weakness should look further into Ameriprise. The only risk the company would face against operating performance would be the decline of AUM. This may happen at times of market under performance such as we have seen recently, but it should be noted that this also increases the amount of meetings with financial advisers in which the client is charged for. The market will eventually lead itself higher as it has throughout history, and Ameriprise will benefit as more and more become ready for financial advise and planning for their future. The company is an obvious beneficiary of a large and growing aging generation that will utilize its services. As the company continues to expand its reach with additional advisors it can be expected that the company will add further revenue as well. With no performance issues within its operation, an attractive share repurchase program, low valuation, and high dividend yield there is not much to dislike about Ameriprise at this time. I have started a position and believe other investors should look further into Ameriprise as a potential candidate for their portfolio.
Disclosure: I am/we are long BLK, AMP.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am not a financial adviser and all investors should complete their own due diligence before making any investment decision.