Ameriprise Financial Inc. (NYSE: AMP) and raising our target price to $178 from $170. Ameriprise has generated solid revenue in recent quarters, driven by steady growth in assets under management in the Advice & Wealth Management segment. However, the company’s 3Q adjusted operating earnings (excluding unlocking) of $4.27 per share were negatively affected by lower interest rates. (AMP reports adjusted earnings excluding unlocking to highlight the underlying performance of the business. Unlocking refers to the recognition of deferred acquisition costs (DAC). Life insurers carry DAC on their books and amortize the expense over a set schedule.)
We expect long-term growth at Ameriprise to be driven by the addition of experienced financial advisers, an increase in fee-based accounts, and improving revenues from asset manager Columbia Threadneedle. On valuation, the stock is trading at a P/E discount to peers. Our revised target price of $178, combined with the dividend, implies a potential total return of 13% from current levels.
AMP shares have fallen 3.3%, compared to a 2.5% increase for the broad market and a 9.6% decline for the IAI (Broker Dealer & Securities Exchange ETF).
We note that the stock has a high beta of 1.75.
On September 28, AMP reported that 3Q20 adjusted earnings rose to $4.27 from $4.24 a year earlier. Adjusted net revenue fell 1% to $3.0 billion and adviser productivity rose 3% to $668,000. Total advisers rose to 9,905, with 99 experienced advisers joining the firm in 3Q.
In 3Q20, AMP repurchased 2.1 million shares for $319 million. It also paid $129 million in dividends ($1.04 per share). The company announced a new share repurchase authorization of $2.5 billion through September 2022.
After obtaining Federal Reserve approval in April 2019, the company launched Ameriprise Bank FSB. The bank offers deposits, mortgages, credit cards and lending services to clients, and now has $6 billion in assets. The company intends to rollout mortgage offerings nationwide.
EARNINGS & GROWTH ANALYSIS
Ameriprise organizes its business into four segments. We look at recent trends and forecasts for these segments below.
In Advice & Wealth Management (60% of net operating earnings), earnings fell 19% to $320 million, reflecting a revenue decline of $116 million due to lower interest rates, offset by substantial growth in wrap fee accounts.
Asset Management earnings (37% of net operating earnings) rose 14% to $198 million due to improved asset valuations.
The Retirement & Protection segment saw earnings rise 14% to $206 million, primarily due to a decline in withdrawals and surrenders. Unlocking resulted in a $295 million loss, driven by lower interest rate assumptions.
In the Corporate & Other segment, the 3Q operating loss was $58 million. The company discontinued the sale of fixed indexed annuities in 2Q20.
We expect growth at Ameriprise to be driven by increased revenues in the Advice & Wealth Management and Asset Management segments, but look for net interest income to face pressure given recent Fed actions on interest rates. We also see the company’s opening of its own retail bank, now with over $6 billion in assets, as a driver of future growth.
FINANCIAL STRENGTH & DIVIDEND
The company issued $500 million in long-term debt that settled in April.
Ameriprise recently raised its quarterly dividend by 7% to $1.04, or $4.16 annually. During the quarter, AMP repurchased 2.1 million shares for $317 million.
MANAGEMENT & RISKS
AMP is led by Chairman and CEO James Cracchiolo. Walter Berman is the CFO.
The company faces a range of business and economic risks, including changes in interest rates and credit quality, regulatory complexity, and market volatility.
Based in Minneapolis, Ameriprise Financial, through its subsidiaries, provides financial products and services to individual and institutional clients in the U.S. and internationally. It has four business segments: Advice & Wealth Management, Asset Management, Annuities & Protection, and Corporate & Other.
Despite strong results in Advice & Wealth Management, AMP is trading at a P/E discount to peers. AMP earnings in 3Q were lower than expected due to the precipitous drop in interest rates. However, we expect future growth to be driven by the addition of experienced financial advisers, an increase in fee-based accounts, and improving revenues from asset manager Columbia Threadneedle. Our revised target price of $178, combined with the dividend, implies a potential total return of 13% from current levels.