Ameriprise: Providing Returns In Good Times And Bad

Summary

• Ameriprise Financial showed resiliency with continued net investment inflows during the pandemic.
• The company has outperformed the S&P 500 over the long run due to its resilient business model.
• Aggressive share buybacks and a dividend increase with a low payout ratio contribute to the total return story.
• Shares have material upside from the current level.

Investment Thesis

Ameriprise (NYSE:AMP) is a large and well-established financial services firm with 986 billion in assets under management. The firm showed strong resiliency during the pandemic with continued net investment inflows even during the stock market downturn. While some may believe Ameriprise’s fortunes are tied to the ups and downs of the stock market, I will show why that is not necessarily the case. I addition, I believe there is remaining upside even after the recent run-up and will show why.

Share Performance

Ameriprise’s recent share performance has been largely affected by volatility in the market. As seen in the 6-month chart below, the stock had relatively low volatility in the pre-pandemic time period, followed by deep underperformance relative to the S&P 500 at the trough of the crisis. As of today, it still underperforms the market by 600 bps.

(Source: Yahoo Finance)

This short-term underperformance, however, masks the inherent strengths in Ameriprise’s business model, which has demonstrably outperformed the S&P 500 by a wide margin since its spinoff from its parent company, American Express (AXP), in 2005.

(Source: Dividend Channel)

As seen above, $10K invested in Ameriprise back in 2005 with dividend reinvestment would be worth $62,715 today, representing a total return of 527% and an impressive 13% CAGR. This far outpaces the $35,000 that the same investment would be worth had it been invested in the S&P 500, with an inferior 250% total return and an 8.9% CAGR.

As the long-term market returns on average 10-11% per year, the couple of extra percentage points in a 13% CAGR makes a big difference when the effects of compounding are factored in.

Resilient Business Model

From an outsider’s lens, one may view Ameriprise’s performance as being inextricably tied to the stock market. That’s is not the case, however, as Ameriprise has demonstrated that client inflows didn’t stop even during times of economic turmoil and uncertainty. As seen below, the company continued to experience net investment inflows in its largest Advisory and Wealth Management segment even during the darkest days of the pandemic, albeit at a slower rate.

(Source: Q1’20 Investor Presentation)

I see the results above as a sign of a loyal client base. While clients may pull funds out of higher-risk equity funds held with Ameriprise, they overwhelmingly decide to keep those funds invested with the company in either lower-risk bond funds or in a cash management account, similar to how funds are kept for safekeeping in a traditional bank account. This allows for Ameriprise to continue earning fees no matter how that cash is invested, while the client has funds available for ready deployment when opportunities appear. Evidently, management expects clients to put cash to work, as CEO Jim Cracchiolo stated on the most recent conference call:

Client brokerage cash balance increased close to 30% to more than $32 billion as clients built up cash given market volatility. Growth in cash slowed in April, and we would expect these assets to be put back to work in the future. Even with the market pullback, client activity and flows in March were solid, and that continued in April. Our advisors are working closely with clients to keep them focused, help them adjust and look for opportunities.

I also like the fact that Ameriprise, like its financial services peers, operates on an asset-light business model without the capex that so often befalls large industrial companies such as Boeing (BA) and General Electric (GE) during an economic downturn. This enables cash to be returned at a higher rate, as evidenced by the high 22.9% margin and 39.7% return on equity as seen below. Encouragingly, management recently noted that advisor productivity increased by 8%, which helps to explain the ROE increase that the company has experienced.

(Source: Q1’20 Investor Presentation)

One thing to watch for, however, is the Annuities and Protection segment, which saw a revenue decline and a slight decrease in operating earnings as the segment was hit by net outflows and yield compression brought upon by lower interest rates. I’m not too concerned, as this segment continues to generate stable operating earnings that were down by just 2.7% YoY. In addition, the segment represents just 12% of the total company-wide operating earnings, but it is something worth monitoring.

Balance Sheet and Dividends

The balance sheet remains strong with a 35% LT Debt-to-Capital ratio and an A rated balance sheet by S&P. In addition, the company has $1.7 billion in excess reserve capital and $2 billion in liquidity, providing ample room for share buybacks and dividends. Capital returns to shareholders remain an important part of investing in Ameriprise, as the company reduced 8.6% of its outstanding shares over the trailing 12 months, resulting in an EPS boost by that same percentage based on share reduction alone.

Based on the recently increased dividend rate of $1.07 per share and earnings of $5.41, the payout ratio remains safe and low at 19% based on dividends/earnings, providing ample room for increased dividends and continued buybacks.

(Source: Q1’20 Investor Presentation)

Key Risks

As with any financial services provider, management reputation is extremely important, as perceived transgressions can lead to an exodus of capital and materially reduce assets under management, thereby reducing the management fee revenues they receive. This is something worth monitoring.

In addition, sustained or further yield compression can negatively impact the company’s fixed asset funds and lead to further yield compression in its Annuities and Protection segment. This risk is mitigated by the potential for investor migration to equity funds due to yield compression. In addition, the Annuities and Protection segment represents a relatively low 12% of operating earnings, so the impact shouldn’t be too material.

Investor Takeaway

Ameriprise has proven its resilient business model with the ability to keep client investment dollars on its platform, even during times of economic turmoil. Its business model not as negatively impacted by the swings of the stock market as some may think, as net investment inflows were still positive during the pandemic. In addition, aggressive share buybacks and the recent 7% dividend increase, combined with a low payout ratio, make me believe investors will be rewarded for years to come.

(Source: F.A.S.T. Graphs)

As seen on the F.A.S.T. Graph above, shares are still in value territory at the current price of $159.59 and P/E of 9.9, which is under the normal P/E of 12.6. Applying a conservative forward P/E of 12, I have a Buy rating with a price target of $193 per share, representing a potential Annual ROR of 24% including dividends.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.