Attractively Valued Ameriprise Financial: a Long-Term Total Return Opportunity Raises Dividend 16% by Chuck Carnevale, F.A.S.T. Graphs
Prior to making an investment in any stock, I always proceed with a clear investment objective in mind. However, my objectives are not necessarily the same every time I invest in a stock. There are times when my objective is current income, and in contrast there are other times when my objective might be maximum total return. At other times, I may be seeking a combination of both income and growth. My investment objective is determined by what my needs are at the time.
Additionally, I do not engage in vague or generalized objectives such as trying to beat the market. Instead, I endeavor to have an exact and realistic objective and precisely estimated return calculation that is commensurate with the type of common stock I may be examining. For example, if I was looking for maximum current yield and reasonable safety in order to provide a specific level of current spendable income, that is where my focus and analysis would be. With this need for a current income objective, I might turn to researching high-yield low-growth utility stocks.
However, and this is the crux of my position, I would not invest in a utility stock thinking that I will outperform the market in either capital appreciation or total return. Utilities tend to be slow growers, and as such, do not usually produce high capital appreciation. On the other hand, when I invest in a utility stock, I fully expect to receive significantly more income than the market would provide. Consequently, I would measure the success or failure of this investment based solely on the dividend income I expect to receive.
In contrast, if I was looking for high total return, my focus would primarily be on the earnings growth potential of the stock I was considering. If I was desirous of generating a high total return capable of beating the market, I would look for a company that I was confident would generate a higher earnings growth rate than the market. And most importantly, in either case, whether I was investing for current income or total return, fair and sound current valuation would have to be evident. Fair valuation is the universal principle that prudent investors are wise to consider regardless of the type of investment or return objective that is desired.
Once my general investment objective is clearly defined and established, my focus then turns toward a specific and precise return calculation. In other words, I never invest in a stock merely hoping that it might go up. Instead, I always have a specific return number and objective that I expect my investment in a specific stock can provide. Moreover, my precise return expectations are always based on rational assumptions which I input into standard rate of return calculation formulas. These rates of return assumptions, based on rational inputs, become my benchmark that I closely and continuously monitor and evaluate.
Ameriprise Financial Inc: Double Digit Total Return Potential and Dividend Growth
The research candidate I am reviewing in this article, Ameriprise Financial Inc (AMP), is offered for the consideration of those retired or dividend growth investors in need of above-average total return. In the long run, the future total rate of return that an investor can expect from a given stock will be a function of three critical inputs. These are the future rate of change of earnings growth, the future rate of change of dividends (if the company pays one) assumed to be consistent with earnings growth, and finally the valuation that was paid at time of purchase. Total return is comprised of two components capital appreciation plus dividend income (if any).
In the specific case of Ameriprise, the consensus earnings growth rate out to fiscal year-ending 12/31/2017 is 13.4%. However, the 3 to 5-year longer-term earnings growth expectation is even higher at 19.4%. That is significantly above expectations for the market, and therefore, a very attractive opportunity for potentially achieving long-term double-digit total returns.
Furthermore, if we input the logical assumption that Ameriprise will maintain their typical dividend payout ratio of 25%-30%, we can forecast that the dividend will increase accordingly. The company’s announced 16% increase in the dividend supports that view. Finally, the company can currently be purchased at a blended P/E ratio of approximately 14.3 indicating fair value, and we can also assume that a fair value P/E ratio on future earnings of approximately 15 is reasonable.
Utilizing the calculating functionality of the F.A.S.T. Graphs™ Forecasting Calculator, these inputs indicate a total annualized rate of return out to fiscal year-end 2015 of 16.96%. This total return calculation is comprised of a potential for a price increase of $59.12 representing capital appreciation of 46.49%. Additionally, a pro rata dividend payout of $7.57 in addition to the price increase brings the total potential gain to $66.69, which equates to a total rate of return of 52.44% out to 2017. The details of this calculation are presented in the pop-up on the Estimates calculator below (red arrow). Note: Yesterday’s announced dividend increase is not yet indicated on the graphs. The 2015 dividend will calculate to $2.59 ($.58 plus 3X $.67).
The longer-term 3 to 5-year estimated earnings growth rate is even higher at 19.4%. This would imply a 27.39% long-term (3-5 Year) rate of return (see pop-up box on graph). Consequently, both intermediate-term and longer-term total return opportunities appear very strong based on intermediate and long-term consensus estimates.
The following “Analyst Scorecard” summary of analyst accuracy when making 1-year forward and 2-year forward earnings estimates provides confidence that analysts have historically been quite accurate with their earnings forecasts on Ameriprise. This simply provides additional confidence that the company might meet current analysts’ expectations.
The following earnings and price correlated F.A.S.T. Graphs™ on Ameriprise since they were spun out of American Express in 2005 provides further confidence in the company’s ability to meet future consensus earnings estimates. In other words, forecast future earnings growth rates are consistent with what the company has been able to accomplish in the past. It is also noteworthy that this asset management company, with a strong S&P credit rating of A, maintained strong profitability through the Great Recession. Although stock price fell beyond what earnings results justified, the company raised their dividend each year and stock price quickly moved back to fair valuation.
Although the first quarter fiscal 2015 announcement was generally good, the following statement by Chairman and CEO James Cracchiolo announcing a long-term care reserve increase created a strong negative market reaction, and I contend buying opportunity:
“Overall Ameriprise had another good quarter and was situated well. However higher equity market volatility, unfavorable foreign exchange and continued low interest rates did effect results as did the long-term care reserves increase. That said, our capital position, ability to generate good free cash flow and deploy capital, all remained excellent. For the quarter our operating earnings per share were up 7%. From a return on equity perspective we continued to deliver.”