(Published by Nick McCullum on June 13)
One of the most important determinants of a business’ long-term success is the strength of its competitive advantage – the "secret sauce" that differentiates it from its competitors and allows it to remain highly profitable through even the toughest economic environments.
Determining and measuring a company’s competitive advantages can be difficult. One of the most meaningful signs of a strong competitive advantage is a long history of steadily increasing dividends.
Why is that?
A company must have a durable and defensible competitive advantage to raise its dividend every year for many years. When a company has increased its annual dividend each year for many years, investors tend to take notice. Ameriprise Financial (AMP, Financial) is an example of this phenomenon.
In fact, Ameriprise Financial is a member of the Dividend Achievers, a group of shareholder-friendly companies that have increased their dividends for 10-plus consecutive years.
You can see the full list of all 265 Dividend Achievers here.
Note: Ameriprise Financial actually froze its dividend in 2009. Sure Dividend does not decide who is included in the Dividend Achievers Index, and it is unclear why Ameriprise qualifies for inclusion given its 2009 dividend freeze.
Ameriprise Financial’s above-average dividend yield and long dividend history helped it to rank as a Top 10 Stock in the most recent edition of the Sure Dividend newsletter.
Business overview
Ameriprise Financial is a U.S. financial planning leader with more than $800 billion of assets under management (AUM).
The company manages 112 four- and five-star Morningstar mutual funds and through its network of more than 9,000 advisers, delivers comprehensive financial planning services to 2 million-plus customers – primarily those with $500,000 to $5 million of investable assets.
Ameriprise was founded in 1894 as Investors Syndicate and was later acquired by American Express (AXP, Financial) in 1984. In 2005, the entity was spun off to AMEX shareholders under the ticker AMP.
Ameriprise Financial operates in five segments:
- Advice & Wealth Management.
- Asset Management.
- Annuities.
- Protection.
- Corporate & Other.
For the sake of reporting financial performance, the Annuities and Protection segments are combined and the Corporate & Other segment is generally excluded to give the company three reporting segments.
Historically, Ameriprise’s Annuities & Protection segment has been its largest contributor to operating earnings although this has changed in recent years thanks to the firm’s robust growth in its Advice & Wealth Management and Asset Management divisions. Each is described in more detail below.
Ameriprise Financial’s Advice & Wealth Management segment invests $479 billion of client assets with more than $200 billion of this capital invested through fee-based, investment advisory assets (think registered investment advisers or RIAs).
Ameriprise’s Advice & Wealth Management segment differentiates itself by having strong brand recognition and high client satisfaction rates. Further, this business is economically appealing as almost 80% of the segment’s revenue is recurring in nature.
Source: Ameriprise Financial Presentation at the 2017 Credit Suisse Annual Financial Services Forum, slide 5
Ameriprise Financial’s Asset Management operating segment is responsible for $454 billion in assets under management.
This segment has broad exposure to both retail and institutional clients and manages 112 four- and five-star Morningstar mutual funds, giving it healthy exposure to investors looking to purchase only the best investment products.
Further, the company’s asset management segment has more than $100 billion in multi-asset managed products, which are key in attracting clients in today’s hands-off investing environment.
This segment is also highly profitable. Ameriprise Financial’s asset management segment reports profit margins in the 35% to 39% range through strong expense management and dependable revenue growth.
More details about the company’s asset management segment can be seen below.
Source: Ameriprise Financial Presentation at the 2017 Credit Suisse Annual Financial Services Forum, slide 6
Although previously the company’s largest segment by far, Ameriprise Financial’s Protection and Annuities segment has not grown as quickly as its other operating segments. The company currently manages $196 billion in life insurance policies and $87 billion in annuity account balances.
The company currently manages $196 billion in life insurance policies and $87 billion in annuity account balances. While these sums are quite large on a nominal basis, they are small relative to the size of Ameriprise Financial’s Advice & Wealth Management or Asset Management segments.
Source: Ameriprise Financial Presentation at the 2017 Credit Suisse Annual Financial Services Forum, slide 7
Moving on, the next section will discuss Ameriprise Financial’s growth prospects in detail.
Growth prospects
Ameriprise Financial’s business model is based on cultivating the adviser-client relationship.
Accordingly, the firm’s growth will be driven by expanding/improving its adviser base and growing its AUM.
The company reported 11% growth in retail assets and 100 additional adviser hires in the most recent quarter.
Ameriprise Financial is actively expanding its adviser base, and many of its advisers stay with the company for long periods. The firm’s retention rate for advisers with 10-plus years of tenure exceeds 95%.
The company will also benefit from an ever-improving mix of operating earnings.
The company’s Advice & Wealth Management and Asset Management segments are seen as much preferable to its Annuities and Protection segment – which, as mentioned, was previously the company’s largest segment. As time passes, Ameriprise is focusing on growing the two more attractive segments to transition its business to a recurring revenue model.
This long-term transition can be seen below. The company has a near-term objective of generating less than one-fourth of its revenue from Annuities and Protection.
Source: Ameriprise Financial Presentation at the 2017 Credit Suisse Annual Financial Services Forum, slide 12
Ameriprise will also benefit from the continued increase in sophistication of the financial markets. A more complicated financial world means more demand for comprehensive financial advice, which increases the total addressable market of Ameriprise Financial.
Competitive advantage and recession performance
Ameriprise’s competitive advantage comes from its brand recognition and the strong performance of its funds. The mass affluent are likely to work with Ameriprise because of its reputation and prestige.
With that said, Ameriprise is not recession resistant. The company reported an operating loss of 17 cents per share in 2008 after reporting per-share profits of $3.39 in the year prior. The company’s adjusted earnings-per-share trend during the last financial crisis can be seen in full detail below.
- 2007 adjusted earnings per share: $3.39.
- 2008 adjusted earnings per share: (17 cents).
- 2009 adjusted earnings per share: $2.95.
- 2010 adjusted earnings per share: $4.18.
The company’s earnings were impacted dramatically by the financial crisis, although the company managed to avoid a dividend cut and returned to profitability in the subsequent year.
Accordingly, investors should expect Ameriprise to perform well in bull markets and poorly during bear markets as clients (mistakenly) withdraw assets as markets decline.
Valuation and expected total returns
Ameriprise Financial’s future shareholder returns will be composed of valuation changes, dividend payments and growth in the company’s earnings per share.
Related: How To Calculate The Expected Total Return of Any Stock
From a valuation perspective, Ameriprise Financial is not an immediately appealing investment.
The company reported adjusted earnings per share of $7.81 in fiscal 2016. Ameriprise Financial’s current stock price of $127.43 is trading at a price-earnings (P/E) ratio of 16.3.
For context, Ameriprise has traded at an average P/E ratio of 12.8 since its spinoff from American Express and an average P/E ratio of 13.7 over the past three years. Based on 2016’s earnings, Ameriprise Financial actually appears slightly overvalued.
2016 was a down year for Ameriprise Financial’s earnings, and the company’s bottom line is expected to rebound considerably in 2017. The company’s valuation using both 2016’s and 2017’s earnings are compared to its historical trend below.
Source: Value Line
Analysts estimate that Ameriprise Financial will earn about $10.00 per share in 2016, which means that the company’s stock price of $127.43 is trading at a P/E ratio of ~12.7 using 2017’s estimated earnings.
Using 2017’s earnings, the company is trading in line with its historical average. Thus, while the company is not a screaming bargain, Ameriprise Financial appears to be trading around fair value right now.
Further, the company’s management team believes that it now merits a higher valuation given its growth in Advice & Wealth Management and Asset Management divisions, which have higher margins and preferred risk profiles when compared to its legacy Annuities & Protection division.
In fact, in a recent investor presentation, Ameriprise Financial stated that it believes its current valuation discount is around its three-year high – presenting a buying opportunity for potential investors.
Source: Ameriprise Financial Presentation at the 2017 Credit Suisse Annual Financial Services Forum, slide 9
To sum up, I would expect valuation changes to have a neutral or slightly positive effect on this company’s future shareholder returns.
The majority of the company’s future returns will be driven by profit growth.
Ameriprise Financial has compounded its adjusted earnings per share at a rate of 8.7% per year over the past decade. A long-term expectation of 6% to 8% earnings-per-share growth is reasonable for this company although earnings will likely grow much slower than this during recessions and much more rapidly during times of economic prosperity.
Investors will certainly benefit along the way from Ameriprise Financial’s shareholder-friendliness. Notably, the company’s first quarter dividend increase of ~11% marked its tenth dividend increase in eight years.
The company is also very active on the share repurchase front. Ameriprise Financial recently announced a $2.5 billion extension to its existing share repurchase program, which amounts to ~13% of its current market capitalization.
The company is very consistent in its capital returns to shareholders. Incredibly, the company has returned more than 100% of its operating earnings to shareholders in each and every year since 2011. Investors can safely extrapolate this trend and assume that Ameriprise will continue placing its shareholders’ interests first for years to come.
Source: Ameriprise Financial Presentation at the 2017 Credit Suisse Annual Financial Services Forum, slide 16
Ameriprise Financial’s future shareholder returns will also be helped along by the company’s current dividend yield.
The company pays a quarterly dividend of 83 cents per share which yields 2.6% on the company’s stock price of $127.43.
For context, the Standard & Poor's 500’s current dividend yield is about 1.9%, which means that investors generate ~37% more income from an investment in Ameriprise Financial than from an investment in an S&P 500 index fund.
Altogether, the company’s shareholder returns will be composed of:
- 6% to 8% earnings-per-share growth.
- 2.6% dividend yield.
For expected total returns of 8.6%-10.6% per year before the (likely minimal) effect of valuation changes.
Final thoughts
Ameriprise Financial has many of the characteristics of a solid dividend investment:
- Above-average dividend yield.
- Attractive dividend history.
- Strong earnings-per-share growth track record and growth prospects.
- Large share repurchase program.
These factors help Ameriprise Financial rank well using The 8 Rules of Dividend Investing.
The company was ranked in the Top 10 Stocks of the most recent Sure Dividend newsletter, making it a buy for those looking to accumulate high-quality dividend stocks with the intention of holding them for the long run.
Disclosure: I am not long any of the stocks mentioned in this article.
