The company's last dividend increase was in April 2014 when the Board of Directors approved a 11.50% increase in the quarterly distribution to 58 cents /share. The company's peer group includes Principal Financial Group (NYSE:PFG), Northern Trust (NASDAQ:NTRS) and Waddell & Reed (NYSE:WDR).
Since going public in 2005, this dividend growth stock has more than doubled in price.
The company has managed to deliver a 12% average increase in annual EPS since 2004. Analysts expect Ameriprise Financial to earn $9.76 per share in 2015 and $11.14 per share in 2016. In comparison, the company earned $8.74/share in 2014. Over the next five years, analysts expect EPS to rise by 17%/year.
Ameriprise Financial has actively used share buybacks to reduce the number of shares outstanding from 247 million in 2005 to 191 million by 2014.
The company operates in five segments. I expect that in the future, its growth will likely come from the Advice & Wealth Management and Asset Management segments, while Annuities and Protection segments will shrink as a percentage of the overall revenue pie.
• Advice & Wealth Management (32.20% of Operating Income); This segment provides financial planning and advice, as well as full-service brokerage services, primarily to retail clients through our advisors. A significant portion of revenues in this segment is fee-based, driven by the level of client assets, which is impacted by both market movements and net asset flows.
• Asset Management (32% of Operating Income); This segment provides investment advice and investment products to retail, high net worth and institutional clients on a global scale through Columbia Management in the US and Threadneedle, which operates internationally. Revenues in the Asset Management segment are primarily earned as fees based on managed asset balances, which are impacted by market movements, net asset flows, asset allocation and product mix.
• Annuities (25.70% of Operating Income); This segment provides RiverSource variable and fixed annuity products to individual clients. The RiverSource Life companies provide variable annuity products through our advisors, and our fixed annuity products are distributed through both affiliated and unaffiliated advisors and financial institutions. Revenues for the variable annuity products are primarily earned as fees based on underlying account balances, which are impacted by both market movements and net asset flows. Revenues for the fixed annuity products are primarily earned as net investment income on assets supporting fixed account balances, with profitability significantly impacted by the spread between net investment income earned and interest credited on the fixed account balances.
• Protection (10% of Operating Income); This segment provides a variety of products to address the protection and risk management needs of our retail clients, including life, disability income and property casualty insurance. The primary sources of revenues for this segment are premiums, fees and charges we receive to assume insurance-related risk. The company earns net investment income on owned assets supporting insurance reserves and capital supporting the business. Ameriprise Financial also receives fees based on the level of assets supporting variable universal life separate account balances.
• Corporate & Other (#N/A). This segment consists of net investment income or loss on corporate level assets, including excess capital held in Amerprise subsidiaries and other unallocated equity and other revenues as well as unallocated corporate expenses
Overall, I am very bullish on companies that offer the tools to assist the 60 million Baby Boomers in their retirement. As there are 10,000 boomers retiring each day, there is the need for financial planning advice. Financial advisors help individual investors craft a plan, and execute it, while trying to create a long-term relationship with the client. The future growth of the company would come from building and retaining long-term relationships with customers. The company has an active sales force of 9,600 financial advisers, which help address customers' needs by selling them Ameriprise products. Almost 75% of its advisors are independent franchisees, who have the right to use the Ameriprise name. Approximately 25% of them are employees of the company.
I believe that investors who utilize the services of a financial advisor are more likely to stick to that advisor. As a result, I believe that investor assets with an adviser at a place such as Ameriprise are stickier than assets under a mutual fund company such as T.Rowe Price. The personal relationship with a client can provide benefits to both the inexperienced investor and the adviser. And a company like Ameriprise can offer an integrated approach to wealth management, and utilize its position in providing annuities and insurance products as well. It also helps that Ameriprise has positioned itself well as the place to obtain financial planning advise. The added risk for Ameriprise is that the advisers could take clients away if they switched to a competitor. However half of the company’s advisers have been with Ameriprise for over a decade, and have an average tenure of 18 years.
Future growth will also be dependent on attracting more client money both domestically and internationally. Future growth will also be aided by strategic acquisitions, which will expand the pool of assets under management. A rising market generally helps in increasing assets under management, which is accretive to revenues and profitability.
Rising stock prices will results in higher revenues and profits. On the contrary, if stock prices were to take a breather or even decrease, this will provide a headwind against further profit growth. In the long run, security prices generally tend to follow an upwards trend. Therefore, it might be a good idea to hope for a stock market correction, before initiating a position in a company like Ameriprise. A correction could provide for an even better entry price.
The return on equity has been pretty consistent between 8 and 11% between 2005 and 2012.The only dip was in 2008, during the depths of the financial crisis. Since then, this indicator has been going up and is reaching 20% in 2014. I generally want to see at least a stable return on equity over time. I use this indicator to assess whether management is able to put extra capital to work at sufficient returns.
The annual dividend payment has increased by 27.20% per year over the past five years, which is higher than the growth in EPS. This was possible because as a new dividend payer, Ameriprise started paying out a small amount, which was later increased significantly.
The dividend payout ratio has increased from 5% in 2005 to 25.90% in 2014. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.
Currently Ameriprise Financial is attractively valued at 12.90 times forward earnings, yields 1.85% and has a sustainable distribution. I recently added to my position in the stock and plan on adding to it further if current yield is closer to 2.50%.
Full Disclosure: Long AMP, TROW
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