Ameriprise (AMP) is a name I wrote up last Fall 2018, as the market was taking a dive. With market volatility picking up again, Ameriprise has also dropped substantially in recent weeks from $150 to under $130 per share. Given this recent drubbing, the stock is roughly flat over the past year, vs the market up 5%.
With a new interest rate environment however, as well as the lateness of the cycle, it is a name worth revisiting. Overall, Ameriprise is insanely cheap, trading at 8x this year’s earnings, well below peers RJF (10.6x) and LPLA (10.7x). It also is trading well below its own historical average in the 10-14x range. Note that the company carries a pristine, net cash balance sheet.
But market declines and lower rates directly impact their revenue. With a rate sensitive business as well as a market sensitive business, and BOTH going against the company by the way, I aim to model a range of earnings estimates under a bear market scenario / bull market bond market. This should give us a thoughtful entry point that minimizes downside.
A quick review of their business segments and recent results:
Advice & Wealth Management (AWM). The biggest Ameriprise segment, AWM focuses on a full spectrum of wealth management needs. Their typical client has between $500,000 and $5,000,000 in investable assets, and is served by almost 10,000 advisors all over the country. AWM this year has been generating impressive double digit revenue and earnings growth. Last quarter, AWM’s Assets Under Management grew 13% to $290BB. Inflow’s were $4.8BB in Q2 2019, a sequential increase of 1.7%. AWM has experienced 9 consecutive quarters in a row of $4BB plus in inflows.
Management intends to grow its number of brokers by about 3% per year. AMP hired 72 advisors in Q2 2019. Margins are strong in the low 20’s. AWM is today 57% of company adjusted operating earnings. Fees are charged as a percentage of AUM, and averaged 1.38% in the first half of 2019, exactly in-line with fees charged in the first half of 2018.
In fact, for the fee compression concerned crowd, fees have been
The above shows that fee compression declines have averaged 1.8% per year over the past 4 years. The trend appears positive however, with fees up 1 bps so far compared to 2018.
Management insists however that fees here are quite stable, with some variation depending on the size of accounts, level of service, and mix of customers. Also, fees are charged daily, so with only beginning and ending quarterly balances, it’s hard to know if figures are exact.
For the record, a recent article by Struble Investment Management miscalculated this fee. The author divided total segment revenue by assets under management, instead of using only fee revenue. His figures suggested 3% fees in 2013 and 2.42% last year. The proper calculation is Management & Financial Advice Fees / average AUM as done above (and confirmed with the company).
The other major revenue line item in this segment, entitled Distribution fees, is actually cash sweep fees the company earns on excess cash balances. Including that would no doubt skew the fee rate math.
The growth here over time can be impressive:
- Market returns average 8-10% per year over long periods of time
- The company typically grows its advisors by 3% per year.
- Fee pressure is likely low, but could reduce this growth rate by maybe 1%.
- The company is launching new products over the next year including deposit base products, credit cards, mortgages as well as price lending.
I think it is safe to see why this business has grown as nicely as it has over time, and even with a little fee compression and zero benefit to new products, can organically grow at a healthy 10-12% rate.
Over the past 5 years, AWM operating earnings have grown 18.5% per year, from $592mm to $1,389mm in 2018. Compare that to the S&P 500 which grew at 12% over the same 5 years (from 1/1/13 to 12/31/18).
Even better, very little capex is needed to fund this growth and so AMP generates tons of free cash flow.
Asset Management. This is the company’s mutual fund businesses, operating under the Colombia and the Threadneedle brands. Threadneedle is the international funds business. They managed $468BB of assets, down 2% as of June 2019 vs the prior year. This business manages 300 mutual funds overall, many sold through the AWM segment, with 58% of their assets in the 4 or 5 star Morningstar categories.
At the end of 2014, Asset Management controlled $506BB of AUM worldwide. As of today, $468BB. This segment seems to be in slow secular decline given competition from cheaper ETF’s. Fund outflows were 4.9% in 2018, and 3.4% in 2017. On the plus side, fee rates seem relatively stable at around 50-55 basis points. This year to date, fees were 52bps, vs 53bp the year before.
(Again, the same author incorrectly calculated fees in another Ameriprise article, also using total segment revenue. That math both overstates the fee and the fee compression actually seen).
Nevertheless, this is a declining business despite what appears to be decent management. Active management continues to suffer, and while this business won’t go away in its entirety, it isn’t worth a big multiple given the state of affairs. Their Threadneedle business has a closed book of insurance assets totalling $30BB, which will naturally decline over time too.
Over the past 5 years however, operating earnings have still grown from $675mm to $728mm, up 1.5% per year. The trend last year showed a 1.6% decline however.
This segment represents 25% of total company earnings. Cost controls and marketing and performance have been impressive at keeping operating earnings flat to up over time.
That said, it’s probably fair to model 1-3% declines per year here. I have suggested to management to perhaps monetize this business, as it is the only one in secular decline. Furthermore, only 14% of these funds are distributed through its own brokers. There is little vertical integration adding value.
Annuities. This segment sells mostly variable annuities to clients in their AWM business. Not to go into too much detail, but variable annuities are sold by their AWM brokers. The company doesn’t intend to grow this business really, so underwriting standards are tight. Revenue was roughly flat last quarter, with operating earnings up 3%.
Protection. Ameriprise recently announced a sale of its Auto and Home insurance business for $950mm (at a little above book value). It wasn’t terribly profitable so was a nice disposal. The deal should close in early Q4 this year. Like annuities, AMP is happy to own their remaining life and disability insurance products in small size as a support to their brokers. They do provide earnings stability and diversification against market declines which impact the AWM and Asset Management businesses. Overall these last 2 businesses are heavily hedged and net dollars at risk are small.
Summing It Up
Taken together, assuming 57% of their earnings (from AWM) grows at 11% per year, against 25% of their earnings (from AM) declining 2% per year, and the rest growing at slow rates (say 1% per year), implies roughly 5.7% annual net income growth even with some fee compression.
The other part of the story is the vast amount of FCF generated every year. That cash is used to buy back significant amounts of stock, particularly when it is down. The company on average has reduced share count by an eye popping 7.7% per year EACH year going back to 2012.
That means the company can likely continue to grow EPS at a 13-14% rate on average over long periods of time. And in fact, that matches up quite closely to the 13% EPS CAGR from 2007 to 2018 as pointed out above.
Investors get all this for 8x earnings.
Sensitivity to Interest Rates and Equity Markets
Ameriprise collects fees in its AWM and AM businesses based on the value of client holdings. Obviously, a market correction or bear market will substantially impact revenue and earnings.
Adding concern to the stock and why it’s beaten up is the fact that lower interest rates also impact earnings.
Here are some important sensitivity tables in the back of their recent 10Q.
First the impact on earnings from lower equity prices:
A 10% price decline would impact total revenue and pretax earnings by $176mm on an annual basis. The footnotes indicate that this assumes a sudden 10% drop in the market with prices staying at such levels for a full year. The company dynamically hedges their exposure, every day in fact.
Obviously a 20% price decline would be roughly double this.
Rates also are an important factor in the company’s earnings.
The table above (also from their recent 10Q) assumes a 1% move in rates higher. With the Fed likely to lower as the economy slows and Fed Funds futures suggesting 3 more rate cuts, I think that a 1% decline (opposite direction of the table’s sensitivities) in Fed Funds is a fair assumption to make.
Overall, the company earns a NIM on client cash balance of roughly $24.3BB. Assuming a 1% hit X 24.3BB in client cash balances = $243mm. Other impacts are small on a net basis, but I factored in an additional $100mm in other losses to be safe, let’s call it $340mm here.
Together a 10% equity market hit with rate impacts would lop $176mm plus $340mm = $515mm from earnings. Here we model that up, assume the sale of the insurance business, some lost margin due to lower revenue, and also bake in a 20% market correction / 2% interest rate hit, just to be safe.
Overall margins here fall 5%. Admittedly, that may not be enough, but over a year or two, it seems reasonable that with half of company costs variable rather than fixed, margins would not be destroyed.
Conclusion: A bear market (20% correction), with stocks staying down for a full year and the Fed taking rates basically back to zero would take FCF/share and earnings to the near $8-10 range give or take. That is from TTM figures of approximately $15 per share.
The good news here is that this is a company that generates huge amounts of FCF. In fact, the company tends to return over 100% of net income every year back to shareholders, mostly through buybacks. And why not? At 8x earnings today it is capital well allocated.
The Asset Management business is probably worth near its peers at 10x. Insurance is worth 8-10x. Using an RJF and LPLA multiple of 10.6x suggests that a fair blended earnings multiple today is at least 10x. That would put fair value at $162 today, and $178 in a year (using street EPS estimates of $16.16 in 2019 and $17.83 next year).
However, note that multiples across the entire industry are much lower than historical levels (with a range typically of 10-14x). The market is already discounting some kind of recession/market drawdown, but is it enough? Here is my sensitivity analysis.
I cannot ignore either the upside case in 2-3 years, or the downside case as this bull market runs out of steam.
With patience and some steely nerves, an investor can own this today and ride the volatility. I personally own a small position now, but in the $100 range I plan to add aggressively.
It is hard to argue that one should own a large position on a stock (albeit a great one) with this level of market sensitivity at near market highs. AMP is likely already discounting a lot of bad news, but not all of it.
Bloomberg shows a 1.6x beta on AMP, which makes sense. When markets rise, AMP undoubtedly will outperform. As this bull market shows signs of wear, this has also been weak. Those with a bullish view may want to own more today, but I am not necessarily in that camp.
Keep some dry powder for AMP. It is well worth following and owning perhaps a small position now, and a much larger one at the right price. It has an amazing track record of growing EPS year in and year out (EPS up 21% over the past 6 years). Despite concerns of margin and fee pressure in their Asset Management business, investors seem to be ignoring the fantastic FCF at AWM and how much capital is returned to shareholders every year.
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Disclosure: I am/we are long AMP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.