I’ll keep this short and sweet and say I’ll never AMP Limited (ASX: AMP) shares directly for my portfolio.
I say ‘directly’ because there’s a high chance I have some exposure to it via my Super or an Exchange Traded Fund (ETF).
Nonetheless, AMP is probably the only Aussie blue chip share that I can safely say I would be quite comfortable to never see it in my share portfolio.
But before I get too ahead of myself, here’s why some investors might own AMP shares (and I might be wrong):
- Its history dates back decades and investors probably got shares in the company 20 years ago when it was formed as AMP Limited and listed on the exchange.
- Traditionally, it’s paid a decent dividend to investors. Even now some analysts are forecasting a dividend yield north of 5% (fully franked).
- It’s a financial company with a leading share of the lucrative market that is financial planning.
Here are two reasons I won’t buy it:
1. In my opinion, AMP was already a basket case before the Royal Commission revealed just how bad it had been to its clients, planners and the regulator, ASIC.
I rarely look at share prices as a measure of a company’s operational success but if you take a long term view and see that a company hasn’t budged, something might be amiss. As Ben Graham said, the market is a weighing machine…
The thing is, I think AMP survived all those years prior to the Royal Commission because it was able to flog crappy investment and insurance products through its platforms and distribution network. So if a falling share price was all it could achieve when it was doing the wrong thing, I can only imagine it’ll be worse when it tries to do the right thing.
2. In my opinion, AMP doesn’t have a durable advantage over its peers.
Related to point one, I like to find companies that can achieve above-average returns on invested capital for years on end. That’s finance for, ‘a great business is one which can invest its money in growth opportunities at higher rates of return than the competition’.
On one side, AMP competes with big banks like Commonwealth Bank of Australia (ASX: CBA) and ING Groep (NYSE: ING) – I profiled shares in both banks here. On another side, it competes against the likes of Macquarie Group Ltd (ASX: MQG) and Magellan Financial Group (ASX: MFG). Finally, there are fantastic independent financial planners, start-ups, robo advisers and more, all looking to take a slice of the planning and wealth management pie.
In the past five to ten years, AMP’s returns on capital and equity have fallen. That could improve once the bank divests some assets, pays its fines and remediates clients, but even if its shares are very cheap right now I see little to get excited about beyond the short term.
Buy, Hold or Sell
Never say never but I think it’s highly unlikely AMP shares will find their way into my portfolio.
Of course, I’m biased because I work in the industry. But if I were looking for dividend income I would buy an ETF or invest in other more reliable companies with brighter long-term growth prospects – 3 of which can be found in the report below.
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