It’s the middle of the trading week and amidst all of the mainstream media buzz about regional banks as well as Fed chairman Powell’s remarks, we are revisiting another stock in what we like to call the diversified financial services sub-sector which encompasses insurance, retirement solutions, asset management, wealth advisory, and more.
So far, this sub-sector has proven to be a hidden gem more often than not.
In the spotlight today is Ameriprise Financial (NYSE:AMP).
It appears both of my prior outlooks on this stock have materialized. Since my June article calling to hold on to this stock, it has gone up +19%. Since my October follow-up coverage calling for a buy on this stock, it is up +18%.
With this firm’s latest earnings results from Jan. 24th still fresh, it is worth re-examining this stock again now in the new year.
Our thesis this time is to call for a hold of this stock, thereby slightly downgrading from last time.
This decision, which we will detail in today’s analysis, is powered by positives such as future EPS earnings growth estimates and YoY growth in the Q4 results, as well as proven dividend and equity growth as well as AUM growth. At the same time, its share price has gotten too expensive for our taste considering the dividend yield and systemic risks to the financials sector that could cause a market pullback this year on this sector at least in the short term.
Our analysis approach follows the waterfall methodology from the world of project management. We want to answer questions like why this stock, what are the risks and benefits, what metrics matter, and what is our exit strategy from this investment.
We follow a sequential approach to get to a business decision of whether to buy, sell, or hold this stock and for our readers, we do so in plain and straightforward language without a lot of financial wizardry.
Initiating: Why this Stock & Sector?
Since Ameriprise has been on our watch list before, using our updated methodology we are answering the question why do we want to initiate an investment idea on this stock?
It is certainly not because it is cheap, now trading at around +$387/share as of this article’s writing.
What it is, though, is well established and stable, and manages a ton of assets, in the trillions of dollars.
From its SA profile, we see it has roots going back to 1894, trades on the NYSE, and covers the spectrum of advice and wealth management, asset management, and retirement, as well as mutual funds and ETFs.
A notable piece of news from this firm in January was that a wealth advisory team managing $525MM in assets has joined Ameriprise, coming from RBC Capital Markets. We see this being a common occurrence, as wealth advisors sometimes jump ship to another firm and take their book of business with them.
As for the financials sector, despite a barrage of mixed news lately, we can see from key market data that financials have generally not only held up but have seen a +3% growth so far this year, and nearly +6% growth in 1 year.
This tells us that this sector for now still has enough support from the market to potentially buy or hold on to stocks in this sector. We are not sure if that support will last long, though, and are keeping an eye on regional banks and their exposure to high-risk office loans on their books.
Planning: What are Risks & Benefits?
Now, we can talk about planning for some risks and benefits of this investment idea.
Since Q4 earnings came out recently, let’s go over those numbers first to see where this firm is at since October.
The positive news is that the firm grew YoY revenue in Q4 to $4.16B, vs $3.67B in Dec. 2022.
Earnings (net income), however, declined YoY to $377MM vs $494MM in Dec. 2022.
The firm also grew equity YoY to $4.72B, vs $3.6B in Dec. 2022.
Future EPS growth estimates by analysts are calling for an expected +18% EPS growth by Dec. 2024.
In this type of business, a key metric that is followed is growth in assets under management (AUM) and fund inflows since that can lead to future fee income on those assets. We know from Q4 commentary that AUM got a tailwind:
Assets under management and administration reached $1.4 trillion, up 15 percent from strong client net inflows and market appreciation.
Here are some more metrics from that Q4 report to consider and why we like the diversification of this firm’s business model:
Retirement & Protection Solutions sales increased 19 percent, primarily from strong sales growth in structured variable annuities.
The Wealth Management business continued to deliver profitable organic growth. Total client net flows were $23 billion in the quarter.
Further, we want to mention that this is a very fee-driven firm and less exposed to things like the squeeze on net interest margins as we have seen in some banks we covered.
However, besides YoY fee growth the firm has seen significant YoY growth in net investment income:
In addition, the company does not make mention of exposure to risky loan portfolios such as commercial real estate/office properties, which has been an issue with some banks and a risk we have been talking about since last summer.
In terms of the assets this firm looks after, the largest class is equities, followed by fixed-income, both of which have seen YoY growth.
In a word.. diversification.. and that seems to be what this firm is all about, so we have a positive sentiment so far about its risk/benefit profile to an investor.
We agree with the estimate of future EPS growth as we think it will be driven by continued growth in equity markets which will drive more fee income on managed assets, especially since equities are the biggest class this firm manages.
In fact, just 3 days ago Reuters reported that “U.S. stocks ended sharply higher on Friday and the S&P 500 registered an all-time closing high as strong earnings and a blowout January employment report boosted confidence in the economy.”
Executing: Is the Price & Valuation Justified?
At this point, our planning shows this firm has an attractive risk/benefit profile, so at this stage, the question is whether we execute a buy at the current price, sell, or hold on to existing shares bought earlier.
Below is the latest YCharts for this stock:
In this example, we compare the share price ($388.42) vs the 200-day simple moving average, an indicator we like because it smooths out the price volatility.
We can see how this stock was affected by the spring dip in financials (after some regional bank failures), so that is something to think about in 2024 in the event there is a market pullback in bank stocks again, as it could affect this stock. That is a downside risk to this chart, we think.
Currently, the shares are trading at nearly +15% above the 200-day SMA.
We think this presents a buying risk in the short-term, in the event of another pullback in financials if further headaches surface regarding exposure to bad office loans, even if Ameriprise itself is not exposed to those loans.
Now let’s see what the market thinks, by looking at valuation.
The forward P/E ratio is 12.27, even though the sector average is 10.77. We think this elevated multiple is driven by those future EPS growth estimates we mentioned earlier. We happen to agree that there is a strong probability of EPS growth as we already stated, so that would justify this multiple.
The forward P/B ratio is 6.79, much higher than the sector average of 1.02. We think the market is expecting more equity growth, and we think they are right as it will be driven by earnings growth.
Keep in mind that the sector average may also include banks, and so for example a regional bank like Columbia Banking System (COLB) is seeing much lower valuations as its share price is trading well below its moving average and its future EPS estimates are calling for declines this year. So, Ameriprise having above-average valuations must also be taken in context of the larger financial sector it is in, which includes regional banks.
In a nutshell, while we think Ameriprise has strong fundamentals (profitability, equity growth, AUM growth) its current elevated price and valuation present a downside risk because of the sector it is in, in the event investors become fearful of all financials like what we saw in the wake of the Silicon Valley Bank and Signature Bank failures last year. That is something to think about as it can impact short-term unrealized capital gains/losses on a portfolio and make it harder to exit a position in the short term if needed.
Monitor & Control: What Metrics Matter to this Sector?
So far, we have proceeded along our waterfall process and determined the company’s risk profile is attractive however the overall sector is one of caution.
What could help or hurt the case for this stock are two metrics we like to track on an ongoing basis. Dividend yield is one, as it may convince us to execute a buy on a stock, but there is also dividend growth which gives us an idea of the firm’s ability to return capital back to shareholders.
We see that the annual dividend grew from $2.26 in 2014 to $5.30 in 2023, a +138% growth in 10 years, with history showing the company reaffirming its quarterly dividend of $1.35 with an ex-date this week on Feb. 8th.
In comparing its dividend yield vs. peers, we used firms with some similar business lines such as asset management and wealth advisory shops, including Morgan Stanley (MS), BlackRock (BLK), and Raymond James Financial (RJF).
From our comparison, it seems Morgan has the best yield at 3.87% (nearly 4%), while Ameriprise is last at 1.36%. So, even though Ameriprise has a hefty quarterly dividend payout of $1.35/share, its current share price is almost $400/share to grab this stock. By comparison, Morgan’s quarterly dividend is an attractive $0.85/share while the share price is just $86. In terms of dividend yield at least, it seems to present a better buy potential.
So, holistically after having considered all the metrics today, we will be slightly downgrading our October buy rating to a hold today, as this stock presents a strong case to hold. Contrary to the consensus today on SA, which is more bullish on this stock, we are exercising more caution this time and have already stated why.
Closing: When do I Exit This Investment?
Since our waterfall process has gone step by step and come to the decision to hold this stock, rather than buy or sell now, the final closing step is to determine an exit strategy and its impact on our portfolio (assuming we were actually trading this stock).
We think all investments, from stocks to real estate, should have some exit strategy.
In our portfolio simulation for this stock, assume we bought at the spring price dip when the market was fearful of financials (which was a great buying opportunity). We are already seeing an unrealized capital gain by now. This is a stock we would keep long-term in a portfolio as part of a diversification strategy with about 10% exposure to the financial sector (banks, insurance, asset managers, etc.). So, the exit in terms of a sell would be more longer-term thinking and only if we can get 25% or more in capital gains.
In the short term, should this stock’s price take a 20% dip due to sector bearishness, it would not have a major impact on us since we bought at the spring dip. Had we bought today, though, at $388 and it took a 20% drop this spring again, that would be an unrealized loss of $77/share, which is quite a portfolio loss potentially, at least on paper.
We like this as a stable dividend earner and dividend grower, so we continue to be long Ameriprise, but would only consider a buy if that price retreats again, which also could present a much better dividend yield, as we are looking for yields in the 4% or better range.