In its two decades on the share market, AMP has come to exemplify the classic mistake of associating a strong brand with a strong share market performance.
It certainly has the former, as a major financial services player, and a market leader in Australia and New Zealand, but AMP has been anything but a success in the stock market, turning its 1997 demutualisation price of $10.43 a share into $4.79 at present.
It’s a very long way from the takeover bid from the National Australia Bank almost 20 years ago, at more than $20 a share.
Sadly, it has been mostly one-way traffic for the AMP share price, buffeted by the global financial crisis, the 2011 takeover of the Australian arm of AXA Asia Pacific, which did not deliver what was promised (nor deliver it quickly enough), declining margins, funds outflows, slow progress on systems changes and now, an alarming deterioration in the wealth and life insurance businesses.
In price terms, AMP shares are exactly where they were in February 2003.
Over the last five years, the total return from owning the stock – capital gain plus dividends – has been 9% a year.
It’s simply not good enough for a company of this stature.
Over the last 12 months, AMP shares have lost 16.5% – most of it in a particularly dire week for shareholders, after the release of the third-quarter trading update in late October. AMP shares tumbled 15.5% in a week, after revealing a $668 million impairment to the value of the wealth protection business, a $65 million slug to margin guidance and an ugly $44 million “experience” loss for the wealth protection business in the third quarter alone. (“Experience” losses result from more claims than the amount for which company’s actuaries budgeted.) That is almost as much as the business’ $47 million loss in the first half of 2016.
The trading update also delivered the bad news of about $500 million in capitalised losses for 2016 and future hits to profit because of “constant deterioration” in the insurance market.
The trading update actually contained a nice piece of news for AMP shareholders, in the form of a new reinsurance agreement with Munich Re, which is expected to release up to $500 million of capital from AMP Life, and strengthen the balance sheet.
But the market is simply conditioned to seeing the negatives, especially after the half-year result, announced in August. The interim result saw net profit rise by 3% to $523 million, but underlying profit fall 10% to $513 million.
The major divisions struggled. Wealth management, the single largest earnings contributor (40% of earnings), saw profit decline 5.8% from the 2015 interim result, to $195 million. Wealth protection – which includes life insurance and income protection products – reported earnings more than halved, to $47 million, hurt by experience losses, for the third time in three years. This level of experience losses was not seen from AMP’s major competitors, leading the market to conclude that AMP is losing the claims plot.
Fund flows in wealth management more than halved to $582 million in the first half, as flows into retail and corporate superannuation platforms dried up.
What has become the star of the show – investment arm AMP Capital – boosted its first half earnings by 15% on the back of healthy growth in fee income (performance and transaction fees surged 56% to $61 million) and strong flows into property and infrastructure investments.
AMP’s regulatory capital funds in excess of the minimum requirement were $1.9 billion at 30 June 2016, down from $2.5 billion at the end of 2015. (The new Munich Re reinsurance arrangement, which starts on 1 November, will largely redress this fall.)
But the less-than-impressive performance from the crucial divisions was a shock to the stock market.
Then came the third-quarter update, in which AMP indicated that the volatility in claims was “structural” in nature, and “broad-based.”
Following the update, both Standard & Poor’s and Fitch Ratings cut their ratings on AMP to negative, from stable.
If AMP shareholders thought it could not get any worse, they were mistaken. US hedge fund and activist investor, Harris Associates, has become AMP’s biggest shareholder, with 5.3% of the company, and is reportedly agitating for the removal of chief executive Craig Meller. Still worse was that new chairman Catherine Brenner, after admitting that a “big investor” wanted to see Meller go, publicly stated that the board wanted to see a rapid improvement in the company’s performance.
That was widely seen on the stock market as the chairman throwing the chief executive under a bus, and the inevitable leadership instability and speculation cannot help the share price.
After all of this news, at $4.79, AMP stands below analysts’ consensus target price, which is $5.29 (10.4% upside) on FNArena’s collation, and $4.92 (2.7% upside) on Thomson Reuters’ collation.
Long-term share investments are supposed to produce growing yields on the original price, as the dividend flow increases. But AMP shareholders actually receive – if the 28.3 cents projected 2016 payment is paid – less than they got in dividends 10 years ago, and less than they got in the first full year on the stock exchange, in 1998-99.
AMP has flagged an increase in its payout ratio from 74% in 2015 to as much as 90%. But after a poor first half, analysts expect (on FNArena’s collation of consensus forecasts) earnings per share (EPS) to fall by 41% this year, with the dividend lifted by 0.3 cents to 28.3 cents a share: AMP will dip into reserves to pay this (analysts expect the payout ratio to be 145%).
In 2017, analysts expect EPS to rebound by 78%, from 19.5 cents a share to 34.7 cents, enabling greater largesse with the dividend: but the analysts’ consensus is for a lift of just 1.1 cents a share, to 29.4 cents – hence the expected yield of 6.1% in FY17, likely to be 90% franked. As well, AMP has floated the possibility of capital-management initiatives, so a capital return is very much on the cards.
According to FNArena, AMP is trading on 24.6 times expected 2016 earnings and a much more interesting 13.8 times expected 2017 earnings.
The problem with assessing AMP on its earnings and yield prospects is that analysts are adjusting their expectations for both measurements downward, and the volatility in AMP’s earnings is not going away any time soon – the company is dipping into reserves for dividend purposes this year, but will hope that earnings recovery removes the need to do that from 2017 onward.
Longer-term, AMP’s exposure to the Chinese pension market, through its joint ventures with, and 20% stake in, the state-owned China Life, will offer a growth path. AMP wants to leverage the China Life brand to win institutional asset management mandates while making the most of its huge distribution network – about one million life insurance sales agents – to tap into the retail market over time.
But in the short term, especially given the heavy downward pressure on earnings and dividends, AMP does not give you enough reason to own it.
We’re not saying AMP is a sell – but neither would we call it a buy.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
