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Introduction
As a dividend growth investor, I constantly seek new income-producing opportunities. When I see high market volatility, as seen at the moment, there are usually more opportunities. I sometimes start new positions to diversify myself further, and sometimes I buy more shares in positions that I find attractive.
Two sectors that declined significantly in 2022 are information technology and financials. One of my favorite industries in the financial sector is the asset management industry. I analyzed several players, such as BlackRock (BLK) and T. Rowe Price Group (TROW), and I intend to analyze Ameriprise Financial (NYSE:AMP), another asset manager I own.
I will analyze the company using my methodology for analyzing dividend growth stocks. I am using the same method to make it easier to compare researched companies. I will examine the company’s fundamentals, valuation, growth opportunities, and risks. I will then try to determine if it’s a good investment.
Seeking Alpha’s company overview shows that:
Ameriprise Financial provides various financial products and services to individual and institutional clients in the United States and internationally. It operates through three main segments: Advice & Wealth Management, Asset Management, and Retirement & Protection Solutions. These three products offer institutional and private clients a vast offering in a wide price range that suits most financial needs.
Fundamentals
Sales of Ameriprise Financial increased by close to 40% over the last decade. It equates to a growth rate of around 3% annually. The company achieved growth due to higher AUM (assets under management). Some AUM growth was organic, while the company is acquiring other asset managers to increase its scale. In the future, analysts’ consensus, as seen on Seeking Alpha, expects Ameriprise Financial to keep growing sales at an annual rate of ~3% in the medium term.
The EPS (earnings per share) has increased much faster. The GAAP EPS increased by more than 600%, and even the non-GAAP EPS quadrupled in the last decade. EPS growth was fueled by sales growth and higher margins as more assets under management require much fewer expenditures. Moreover, significant buybacks also contributed to the bottom line. In the future, analysts’ consensus, as seen on Seeking Alpha, expects Ameriprise Financial to keep growing EPS at an annual rate of ~11% in the medium term.
The dividend is another bright sport for the company. Ameriprise Financial pays and increases its dividend annually. It has done it since its spin-off in 2005, meaning the dividend has grown for 16 years. The dividend appears very safe, with a payout below 20%, making a dividend cut unlikely. The yield is only 1.75%, yet investors can expect the double digits dividend increases to continue making it a good hedge against inflation.
The number of shares outstanding has declined by almost 50% over the last decade. Buybacks are an additional way to return capital to shareholders besides dividends. The buybacks support the EPS growth, and they are incredibly effective when the company is already growing and its valuation is attractive. Ameriprise focuses on a combination between buybacks and dividends to return more capital to shareholders.
Valuation
The company’s P/E (price to earnings) ratio seems attractive. Shares of Ameriprise Financial are trading for 11 times the forecasted EPS for 2022. It is below our average valuation over the last twelve months. While shares sold for an even lower valuation two months ago, I believe the current valuation is a comfortable entry point. The attractiveness is also attributed to the fact that this is a healthy and growing company.
The graph below from Fastgraphs emphasizes that the shares of Ameriprise Financial are currently attractive. The current valuation is lower than the average valuation over the last 16 years, which stands at 13. Moreover, the growth rate over that period was 12.5%, which is not far from the current forecast for 11% annual growth in the medium term. Therefore, the shares seem attractively valued.
Fastgraphs
To conclude, Ameriprise Financial is a company with solid fundamentals as it grows both the top and the bottom line. The company leverages this growth to achieve dividend and buyback growth. These fundamentals come at what I believe to be an attractive valuation as the valuation is lower than the average valuation. It may be attractive if the company has more growth opportunities and limited risks.
Opportunities
Wealth management is the most significant growth catalyst. It accounted for more than 50% of the company’s operating income in Q2. This segment performs well despite the market’s volatility, and the company is focusing on increasing its focus on the segment. The higher interest rate will serve as an opportunity for the company from cash products.
Moreover, the company is also taking its business internationally. Besides the United States and the United Kingdom, the company has local offices in India. India enjoys a fast-growing middle class, with more capital to invest. Ameriprise Financial is trying to become a leading vendor of financial products for that massive growing market.
Another opportunity for Ameriprise Financial is non-organic growth. The company has very little debt and plenty of cash on hand. With many asset managers suffering from weak stock performance, Ameriprise Financial may acquire them for an attractive price, increasing its AUM in a way that will contribute to the bottom line.
Risks
The current market volatility is a short-term risk for investors in Ameriprise Financial. The volatility may send the stock price lower and decrease the AUM resulting in lower EPS in the short term. Therefore, there is a short-term risk of price declines. However, as long as you believe in the positive trajectory of the world economy, this should not concern you as long-term investors.
The Federal Reserve has been increasing the interest rate sharply over the last several months. Therefore, there are alternatives to low-yield dividends like the one offered by Ameriprise Financial. An investor can buy a safer ten-year treasury note and get a 3.5% interest rate. While I prefer the 1.75% yield with an annual increase, I understand why some investors would prefer the safer government bonds, making the company a less attractive investment.
Competition is another risk for Ameriprise Financial. The company is competing with investment banks, and other asset managers in its wealth management and mutual funds offer. Moreover, it competes with new investment alternatives offering low-cost products that can be decent substitutes for some investors, thus limiting the total addressable market for Ameriprise Financial.
Conclusions
Ameriprise Financial is an excellent company with a long track record of success and strong execution. That execution led to increasing sales leading to higher EPS. The company utilizes its excess cash flow to offer attractive buybacks and dividends. The company has several growth opportunities in the future, allowing for additional EPS and dividend growth.
There are risks to the company’s investment thesis, yet they seem limited and manageable as the company has already dealt with them. The current valuation leaves investors with more than enough margin of safety as the company keeps growing. Therefore, I believe Ameriprise Financial is a BUY and a great addition to a diversified portfolio.
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