Many investors seeking financial services stocks may choose banks such as Westpac Banking Corp (ASX: WBA) and Commonwealth Bank of Australia (ASX: CBA). However, AMP Limited (ASX: AMP) has risen by 13% in the last six months. Here's why that could continue.
Dividend appeal
The reduction in interest rates to 1.5% makes higher yielding stocks such as AMP more attractive. It yields 4.9% versus 4.3% for the ASX and is forecast to increase dividends per share by 6.5% per annum during the next two fiscal years. A key reason for this is a planned increase in AMP's payout ratio from financial year 2015's 74%. AMP plans to pay out as much as 90% of profit as a dividend and this reflects the confidence it has in its financial outlook.
For example, its regulatory capital funds in excess of the minimum requirement increased by 28% in FY 2015 to $2,542 million. This provides AMP with a significant cash buffer in case of adverse market conditions. Further, its cost to income ratio improved by 1% to 43.8% due in part to tight cost controls as well as a 6% rise in assets under management to $226 billion. These figures provide evidence of AMP's improved financial standing, which highlights the potential for dividend growth beyond the next two years.
Strategy
AMP is also focused on customer service improvements which could improve customer loyalty and drive margins higher. For example, it has invested heavily in digital technology such as its online system, My AMP, which provides ease of use for customers as well as cross selling opportunities. It has also invested in its financial advisor network, including in more face-to-face advice. In my view, this builds greater trust with customers and the network generated 24% of AMP's mortgages in FY 2015 as a result.
AMP has slashed costs through its three-year business efficiency programme. It has invested $320 million in a cost saving programme to achieve $200 million in pre-tax recurring run rate cost savings by the end of FY 2016. Measures such as this contributed to a rise in return on equity (ROE) of 50 basis points to 13.2% in FY 2015.
International opportunities
AMP's exposure to China offers growth opportunities. Average incomes in China are forecast to rise from $12,400 per annum in 2016 to over $18,000 per annum by 2020. The country's retirement age is expected to stay at 60 for men and 50 for women between now and 2020, which indicates that the sale of pensions and other savings products could rise. Similarly, sales of consumer discretionary products (including financial products) are forecast to increase by 7% per annum over the same timeframe.
AMP is well placed to capitalise on this growth through its joint ventures with China Life. Combined with its sound strategy and dividend outlook, this means that AMP's shares could continue to rise.
