At time of writing, the share price of AMP Ltd [ASX:AMP] is up a significant 7.23% trading at $1.855.
The last 12 months likely has AMP shareholders feeling despondent with the AMP share price being locked in a slide throughout this period:
Today, we’ll examine the potential for the AMP share price to go back up in a meaningful way. The company has recently completed a capital raising and has revamped its 2017 strategy going forward. We argue that the AMP share price will struggle to build momentum for a while yet.
AMP share price up today, but company still faces headwinds
AMP shares rose upon the commencement of trading today, potentially due to a short squeeze.
A short squeeze happens when short sellers close out their positions, usually because of a positive development that could signal a turnaround.
But let’s dig into their plans to right the ship.
It’s got four main prongs.
It will aggressively cut costs, sell non-core assets, push ahead with the sale of its life insurance business, increase its emphasis on ‘robo-advice’.
The new strategy will be aided by a $650 million dollar capital raise via an institutional placement.
These moves are reminiscent of its previous efforts at revitalising the business that were initially pitched by the previous CEO Craig Meller.
This time around, there could be an air of desperation to the revamp though.
In their half-year results presentation yesterday, they revealed $3.1 billion in net cash outflows with $1.2 billion of this being pension payments to retirees.
With plans to slash adviser numbers by up to a third, on the advice of Bain & Co, the company is seeking to cycle money into the parts of its business that create the best return.
AMP Capital for instance has a return on equity (ROE) of around 52%, compared with AMP Bank which nets 15% ROE.
But is there underlying value to be found in AMP shares?
The Australian Financial Review notes that AMP Capital’s value to the business could make up about $3.4 billion or 85% of its market cap.
This could put a floor underneath the AMP share price. At the same time however, the vultures appear to be circling around the Big Four and AMP.
It’s driven a combination of regulatory pressure, the rise of fintechs and changing consumer attitudes to money.
We take an in-depth look at the threat to bank dividends here.
Outlook for AMP shares
Despite today’s uptick, AMP is still in a particularly tight spot.
The financial advisers it has decided to cut are not happy and planning to contest another measure it is pushing through, which is a reduction to its buyer of last resort (BOLR) rules.
Under the old system AMP would buy back financial advice books at four times earnings.
It has said it will now do this at 2.5 earnings, a significant haircut for financial advisers operating under the AMP brand.
The buy-back of these advice businesses could be a contingent liability of upwards of $1 billion for AMP, according to the AFR.
Their new CEO, Francesco De Ferrari is aiming for a capital return next year, around this period.
The plan for AMP’s dividend is to operate with a payout ratio of 40–60% to be paid at an unspecified time.
So until these dividends come back online, there could be further pain for AMP investors.
To conclude, we don’t see AMP as a growth stock, and it is not operating in a sector that has significant momentum behind it.
If anything, bank stocks and wealth management will become legacy industries or the preserve of older generations.
If you are looking for dividend stocks, our ‘Top 5 Dividend Stocks for 2019,’ is a great place to start your research. None of them are bank stocks, so they could do better at avoiding the plunge in a low-interest rate environment.
In other news, CBA posted an 8% drop in statutory net profits on Wednesday, and also announced it has moved into the buy-now pay-later sector, with an investment in a European Afterpay-style company.
For Money Morning