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Stock Of The Day - AMP (EXPENSIVE)

AMP continues to be Australia’s leading, independent wealth management company in a $2.4 trillion market, with a superannuation sector forecast to double in size by 2024. The company’s underlying profit for 2014 was  $1.05 billion up from $849 million in 2013, which is a 23% increase in profit. AMP continues to have a strong balance sheet with $2 billion of capital over and above the regulatory requirement. Size is a major competitive advantage for the company and it is currently number 1 in retail superannuation and pensions with 19.6 % market share, number 1 in individual risk insurance with 17.9% market share and number 1 in financial advice with 22.2% market share. 

 
Business efficiency program (Source - Company Reports)

The company has a four-way strategy of increasing its customer focus, the first pillar of the strategy being creation of better products and service solutions. Second radically increasing the quality of services across all areas of business, which includes increasing the capability of customer service staff by improving the quality if information technology tools available to them. Third, creating better ways for customers to deal with the company either online or on telephone. Fourth, the company is creating a better face-to-face advice model, so they can reach more and more customers with this type of advice more often. 


Business unit operating earnings (Source - Company Reports)

Some of the key initiatives of the company to execute the above strategy that were undertaken in 2014 were starting pilots of new financial advising approaches, launching market leading smartphone and tablet applications, increasing the functionality of amp.com.au website, making it easier to purchase simple superannuation products, installed new data analytics infrastructure and introduction of new call centre telephony introduction. Note that while these initiatives will improve the operational efficiency of the company, they are not something the competitors cannot imitate in due course of time. They are unlikely to give AMP a durable long-term competitive advantage. 


Maintaining cost control (Source - Company Reports)

Another pillar of company’s strategy is cost reduction to maintain market leading efficiency and reinvest in new customer solutions. AMP’s business efficiency program tracked in line with management expectation and guidance in 2014. The three-year program that started in 2013, aims to reduce the company’s the overall controllable cost growth by reducing costs while investing the savings in areas of growth that will give the maximum return for the shareholders. To achieve this the company rationalised and improved the efficiency of non customer facing group functions, outsourced certain back office process functions, embedded the foundations of continuous improvement culture and installed contemporary IT Infrastructure. Once again, while these initiatives will improve the operational efficiency of the company, they are not something the competitors cannot imitate in due course of time. They are unlikely to give AMP a durable long-term competitive advantage.


Dividends Per Share (Source - Company Reports)

Part of company’s strategy is to tap into the economic future growth of India and China. Australia’s proximity to Asia will be an advantage as the centre of the world economy shifts from West to East. The company launched its first fund through a joint venture in China, the China Life AMP Asset Management Company. This joint venture launched five funds in the year 2014 and manages $3.7 billion on behalf of Chinese retail and institutional investors after its first full year of operations. AMP also acquired a 19.9% stake in China Life Pension Company, the largest pension company in China. AMP is the first foreign company in the world to purchase a stake in a Chinese pension company. The acquisition received Chinese regulatory approval and was settled in January 2015. 


Underlying Profit Over the years (Source - Company Reports)


AMP will continue to invest selectively in Asia and internationally, by taking its investment capabilities into new markets. The company’s strategy is to build strong distribution partnerships with national champions. AMP Capital’s business alliance with Mitsubishi UFJ Trust and Banking Corporation offered nine retail and four institutional funds to the Japanese market in 2014. At 31 December 2014, AMP Capital managed $7 billion on behalf of all clients in Japan. AMP capital is capitalising on increased global interests in its infrastructure and property capabilities. At 31 Decembers 2014, it managed $13 billion in AUM from international investors, including more than $4.7 billion on behalf of 119 global pension fund clients. 
 

However the company has much ground to cover. The company has registered a Net Profit growth of 14% over a period of five years, which is poor by most standards. This happened while the asset base increased 2.8 times. Although the company has maintained a steady dividend per share in the range of $0.23 to $0.30, basic earnings per share have actually declined from 2010 to 2015, from $0.38 to $0.30. In managements own words 2014 was a challenging year for financial advice industry as a whole. The insurance business is still recovering from the poor performance of 2013. There are no concrete plans of management that indicate that company will recover in the near future, only a long term vision of the company to tap into some favourable macroeconomic trends (which will be favourable for the competitors as well).
 
The company is currently trading at a stock price of $6.34, which is close to 52 week high of 6.830. At the current price the company is trading at a Price to Earnings multiple of 21.780 and a dividend yield of 3.94%. There are other companies in this sector that are trading at a more attractive price to earnings ratio and dividend yields.


AMP Daily Chart (Source - Thomson Reuters)
 
Given that the strategic plans of the company are yet to show any strong trends in the numbers, we believe that the stock is expensive at the current price of $6.34.