AMP Limited (ASX: AMP) has just announced a large dividend cut in an update to investors, is it still a good buy?
AMP is a diversified financial services company which has its primary operations in financial advice, including financial planning and wealth management. A big part of its business is licensing other planning groups to provide advice. AMP also has capabilities in investing (AMP Capital), banking and insurance.
AMP’s large dividend cut
AMP said that in its 2018 financial year (FY18) it expects to report a profit of approximately $30 million, whilst ‘underlying’ profit is expected to be $680 million.
As a result of the poor performance in the second half of FY18 and the uncertainty in the current operating environment, the AMP Board has said the company is likely to declare a dividend of 4 cents per share.
In the second half, AMP said its total business unit operating profit or EBIT would be around $220 million. Click here to learn what EBIT means. To get to that figure, $325 million would have been the actual figure from the retained businesses of Australian wealth management, AMP Capital, AMP Bank and NZ wealth management & advice) but there was a $105 million operating loss for the sold businesses.
Why were AMP’s dividends cut?
There are a number of reasons AMP dividends are going lower with profit, including the costs arising from the Royal Commission response, a portfolio review, increased investment in risk, governance and controls, and advice remediation (e.g. paying back customers).
AMP now expects to recognise another $200 million for advice remediation in the December 2018 result. That figure comprises $186 million of costs for running the program and $14 million for customer lost earnings. Compensation for lost earnings will be recognised as paid or accrued every half year.
AMP said that it will continue to prioritise its advice remediation program to ensure all customers are appropriately compensated.
AMP’s Capital Position
The diversified financial business said it’s still strongly capitalised, despite all of the issues, with $1.6 billion more than the minimum regulatory requirements.
AMP reaffirmed its plans to return most of the net cash from the $3.3 billion sale of its wealth protection business to Resolution Life to shareholders.
But in the meantime, AMP is going to pay a 4 cents per share dividend, which is a 10.5 cents per share cut from a year ago, or a cut of 72.5% in percentage terms.
FY19 guidance
AMP said that it expects FY19 profit to be hit by external market conditions, the regulatory environment and the implications of its future strategy.
A number of other factors will also hurt the result, including a $35 million hit from MySuper pricing changes, an $85 million hit from the unwinding of internal distribution arrangements, the sale to Resolution and ‘stranded group office costs’ of around $40 million.
Are AMP shares a buy today?
The AMP share price has fallen 7.1% in early trade, so some shareholders didn’t think it was worth holding after this update.
Rask Founder Owen Rask recently wrote about two reasons why he’ll never personally buy AMP shares, which is worth a read.
I’m inclined to say that the best way for AMP to survive and grow is a radical overhaul of most of its business. That process will be expensive and result in much lower profitability.
Until we get to see what the ‘new’ AMP looks like I don’t think it will beat the returns of the market in the medium term. Therefore, I believe there are ASX shares that could provide a far more reliable return, such as the shares in the free report below.
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