|Shares Out. (in M):||144||P/E||8.3||7.5|
|Market Cap (in $M):||17,607||P/FCF||8.3||7.5|
|Net Debt (in $M):||1,773||EBIT||2,458||2,539|
Ameriprise has grown its EPS at a near 14% CAGR since 2005 and yet it currently trades under 8x the next-twelve-months consensus earnings forecast. To put this year in some context, at the beginning of 2018, AMP was expected to earn $13.25 and $14.55, respectively. Since then, those estimates have been revised up to $14.85 and $16.30, but the stock has fallen from $170 to $125.
I think Ameriprise should be able to continue growing at approximately a double-digit EPS rate over the longer-term. If it can get back to a 12x P/E multiple (where it was at to start 2018), it would be worth about $200 on 2019 EPS or about 60% upside.
I suspect that investors are ignoring the stock because of the perceived risk around its asset management and insurance businesses, including its exposure to legacy long-term-care liabilities, which are in run-off. While I think these concerns are overblown, I believe that their Advice & Wealth Management business is the real crown jewel – a diamond hidden in the rough. As this financial advisory division has become a larger portion of profits, the business has become more capital-light, which has allowed it to repurchase 45% of the shares outstanding over the past eight years. While profits fell sharply in 2008, AMP was able to grow its EPS through the financial crisis - from $3.48 in 2006 to $5.00 in 2011 (an 8.5% CAGR).
Financial Advisory Business
Within Financials, I think the Financial Advisory segment is a great business. It’s based on a flexible cost structure – as employees are generally compensated on some variable payment scheme and management can trim lower-performing advisors during an economic downturn. Meanwhile, revenues are recurring, as they are tied to assets under management, with a low-level of client turnover. And, what I like most is that, unlike banks or insurance companies, this business requires very little capital which means that the income generated from the business is available to shareholders. The allocated capital for this segment is just $765m compared to pre-tax operating profit of $1.35b over the past 12-months.
There is a lot of concern around the shift towards passive and its implications to the asset management industry, but the advisory business can adapt as it has moved from a commission-driven business model to a “wrap-fee” business today where the advisor and client’s interests are better aligned. Ultimately, this is a relationship business and a meaningful aspect of that is planning and coaching clients – preparing advisees with a plan to act logically and not emotionally. A good financial advisor could be described as a financial therapist. And, because advisors have direct relationships with their customers, they are more likely to have sticky relationships, compared to other products in the financial channel – such as insurance or investment management.
Operating profits in this segment have grown from $434m in 2012 to $1,163m in 2017 and were up another 19% through the first three quarters of 2018.
Compared to its peers, AMP has been doing very well. The wealth division of AMP has grown its client assets per advisor by 57%, compared to 41% for its peers (including: Edward Jones, LPL, Merrill Lynch, Morgan Stanley, Raymond James, and UBS – according to AMP’s May 2018 Investor Presentation).
Asset management was about 25% of operating profit in 2017, slightly down from roughly 30% five years ago. While the market is concerned about the move to passive versus active-management, I think there are some offsets to those fears. AMP has both a diversified product line and distribution platform with a healthy mix of equity-funds (55%), fixed-income (35%), and alternatives (10%). While outflows have been modestly negative over the past seven years (~2.5% of AUM on average) and fees have compressed, AMP has been able to adjust its cost structure, keeping its operating profit to AUM ratio relatively constant, as expenses have declined. Furthermore, the percentage of lower fee products (from prior related-party relationships) has declined, which has helped keep operating profits stable. Lastly, the asset management business also does not consume a lot of capital as it is a fee-based business as well.
Another reason the stock has been avoided is because of its exposure to long-term-care liabilities, as peers like Unum or Genworth have persistently understated the risks associated with these policies. However, I think AMP has done a good job providing transparency and dimensioning the potential risk.
AMP began writing long-term-care business in 1989 and sold their last policy in 2002. They think about the exposure in two distinct blocks.
First, the older generation policies that were written between 1989 and 1997, which is about half of the outstanding policies and 56% of the GAAP reserves. This block has been shrinking over the past few years, as the average age of policyholders is about 80 and the average age of policyholders under claim is 87. With this older block of policies, AMP benefits from having substantial credible experience and the actual results have deviated very little from reserves in recent years (this is different than the situations at many of their competitors).
The second group was policies written between 1997 and 2002 – this block has a more conservative risk profile, specifically a smaller portion of the block has lifetime benefits and there are higher premiums per policy.
The company has adequately managed the long-term care exposure. First, they have taken an active approach to steadily increasing rates since 2005. Second, they have taken a conservative reserve position which their statutory reserves nearly $400m higher than the GAAP reserves.
To put some numbers around it, they have $1.1b of GAAP reserves. So, they could have a 35% increase in their reserves without having a capital impact. And, they have said that a 5% increase in morbidity assumptions would have about a $130m impact to reserves, but morbidity frequency has only been increasing about 1% per year. An additional $400m hit would be just a one-time $2 EPS hit, compared to $15 of expected EPS for 2018. So, this risk seems overblown.
Plus, on the 3Q18 earnings conference call, management discussed the prospect of executing a risk transfer deal to shed these liabilities – which they think they could complete without contributing a significant amount of capital.
Capital-Light and Capital Management
As mentioned above, the real beauty of the financial advisory business is that it does not require much capital. This has allowed Ameriprise to reduce the share count to 146.5m in 3Q18 from 262m in 2010, on top of the current 2.5% dividend yield.
Management also has a good history of being opportunistic, as they were able to acquire the Columbia Asset Management business in 2009 (announced) from Bank of America.
On a relative basis, AMP is valued attractively. Among financial advisory firms, AMP is trading at below 8x NTM EPS compared to 10x for Raymond James and 9x for LPL. Plus, AMP has grown its EPS at a faster rate over the 5-10 years.
Compared to other investment managers (AB, AMG, EV, IVZ, LM, and TROW), AMP has had better EPS growth as well, but also trades at a discount to the group average of near 10x (the range is 7x-12x).
Continued earnings and buybacks.