Ameriprise Financial: This High-Quality Dividend Achiever Is Attractive

Ameriprise Financial (AMP) is a high-quality financial company, which is recovering strongly from the pandemic. The stock is one of the oldest holdings of Lyrical Asset Management, which is well-known for its expertise in pinpointing undervalued stocks with promising growth prospects. The stock of Ameriprise has retrieved all its pandemic-driven losses and thus it is currently hovering around its all-time highs. Nevertheless, it remains attractively valued.

Business overview

Ameriprise was founded in 1894. It is a leading financial services firm, with more than $1.0 trillion in assets under management. The company offers extensive wealth management and asset management capabilities to its customers.

Ameriprise experienced a severe downturn due to the coronavirus crisis last year. Due to the temporary collapse in the value of stocks and corporate bonds, the fees it received from its clients decreased. In addition, as is usual in brutal market sell-offs, many customers liquidated their positions. This helps explain the 54% plunge of the stock in about a month, at the onset of the coronavirus crisis last year.

However, the broad stock market has retrieved all its losses while the market is optimistic that the pandemic will subside at the second half of this year thanks to the massive distribution of vaccines all over the world. As a result, Ameriprise finished the year with strong results and its stock has returned close to its all-time highs.

In the fourth quarter, Ameriprise enjoyed nearly $15 billion in net inflows and thus its total assets under management exceeded $1 trillion for the first time in its history. The company thus offset the headwind from low-interest rates and grew its adjusted earnings per share 8% over the prior year’s quarter. As a result, its annual earnings per share fell only 13% over the prior year’s record level, from $16.10 to $14.08.

Growth

Ameriprise benefits from a strong long-term trend, namely the increasing wealth of the middle and high class. It also benefits from the long-term bull market of the stock market, which increases the value of the portfolios of investors and hence the fees that Ameriprise receives from its clients.

These tailwinds are clearly reflected in the consistent growth record of Ameriprise, which has grown its earnings per share in 8 of the last 10 years. During the last decade, Ameriprise has grown its earnings per share at a 12.9% average annual rate. As the aforementioned tailwinds will remain in place for the foreseeable future and given the high quality of Ameriprise’s management, we expect the company to grow its earnings per share at an 8.0% average annual rate over the next five years.

Dividend

Ameriprise has raised its dividend for 14 consecutive years and hence it is a Dividend Achiever. Thanks to its low payout ratio, which currently stands at 30%, and the reliable growth trajectory of the company, it is safe to expect many more dividend raises in the upcoming years. Moreover, the stock is offering a 2.0% dividend yield, which many not be exciting but it is higher than the 1.5% dividend yield of the S&P 500. Overall, the stock is suitable for growth-oriented investors and income-oriented investors with a long investing horizon.

It is also important to note that Ameriprise could offer a much higher dividend but it prefers to repurchase its shares aggressively in order to boost its stock price. As the stock usually trades at cheap (low double-digit) price-to-earnings ratios, share repurchases greatly enhance shareholder value. Notably, Ameriprise has reduced its share count by 52% over the last decade. Overall, the shareholders of Ameriprise should be completely satisfied with the capital allocation policy of management.

Valuation – Expected Return

Ameriprise is currently trading at a forward price-to-earnings ratio of 10.5, which is lower than our assumed fair price-to-earnings ratio of 11.5 of the stock. If the stock trades at our assumed fair valuation level in five years, it will enjoy a 1.8% annualized gain in its returns thanks to the expansion of its valuation level.

Given also the aforementioned 8.0% expected earnings-per-share growth and its 2.0% dividend yield, Ameriprise is likely to offer an 11.7% average annual total return over the next five years. This double-digit expected return is undoubtedly attractive, particularly given the full valuation of the broad market.

Final thoughts

Ameriprise is recovering strongly from the pandemic and thus it is likely to achieve record earnings per share this year. Thanks to its promising prospects, the stock has returned close to its all-time highs but it remains attractive, as it can still offer double-digit returns in the upcoming years. Therefore, investors should consider purchasing the stock around its current stock price.