Attractively Valued Ameriprise Financial: a Long-Term Total Return Opportunity Raises

Attractively Valued Ameriprise Financial: a
   Long-Term Total Return Opportunity Raises
                   Dividend 16%
                                         April 24, 2015
                                     by Chuck Carnevale
                                      of F.A.S.T. Graphs
Introduction

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

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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).

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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.

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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.

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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.”

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Even though, as I previously stated, I never invest in a company without first calculating a precise rate
of return expectation, I also never rely on just one calculation. Instead, I prefer to run a rational
expected case, a moderate case and typically my worst-case scenario. The following forecasting
calculator runs future return expectations based on the historical normal P/E ratio of 13 that the market
has applied to Ameriprise.

Assuming the earnings forecasts come in as expected, but that the company is only capitalized at a 13
P/E ratio by fiscal year-end 2015, still calculates out to a double-digit total annual return in excess of
11% (see pop-up on graph). I would consider this a very attractive moderate case scenario for potential
future returns.

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My final rate of return calculation is made based upon the lowest historical P/E ratio of 12.4 that the
market has applied to this company over the past 8 completed years. Although I consider it unlikely for
this company to trade at such a low P/E ratio in the future, it is encouraging to see that it would still
calculate out to an annual rate of return in excess of 9%.

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The following historical performance results for Ameriprise since they have been a public company,
provides additional confidence and insights into the company’s ability to generate above-average total
returns. In summary, when examining the essential fundamentals at a glance that Ameriprise has
historically achieved paints a picture of a very attractive long-term total return investment opportunity.

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Ameriprise: Thesis for Growth

As indicated above, Ameriprise has provided their long-term shareholders extremely attractive total
returns. It should also not go unnoticed that total cumulative dividend income has also been above
average. In other words, even though the current dividend yield may not appear attractive at first glance
(although the recent 16% dividend increase helps), the growth potential of the dividend going forward
represents an attractive long-term income opportunity.

Nevertheless, as I previously indicated, future shareholder returns will be a function of the company’s
ability to grow earnings at or near the current expected high rate. Current valuation appears sound, so
let’s look under the hood and more deeply examine from where and how future growth might come
from. The following slide from a recent investor presentation provides some important insights into how
the company is positioned for growth.

First of all, they have a solid and growing base of assets under management in excess of $800 billion.
Additionally, the advice and wealth management portion of their business generated 64% of operating
earnings in 2014. The original Ameriprise was founded in 1894, operating primarily as an insurance
company. However, since they were spun out of American Express in 2005, the company has rapidly
been morphing into a wealth management company. The company claims to have more financial
planning clients than any other firm.

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In 2014 annuities and protection (insurance) has become a much smaller segment generating only
36% of their operating earnings. Although insurance provides stable and persistent revenues, for the
most part it is becoming a commoditized industry. Therefore, I consider the company’s objective of
focusing more on the wealth management industry a strong positive.

The following slide also illustrates that the company has a very shareholder-friendly management
team. The company has aggressively returned capital to shareholders through dividends and share
buybacks in 2013 and 2014. Although share buybacks have been significantly greater than the
dividends, since the company’s shares have been reasonably valued during that timeframe, I consider
that a good use of capital.

On the other hand, I was also pleased to see that dividend payments have become a larger portion of
their return of capital to shareholders. This is a good sign, and considering that their payout ratio is
rather low, it could indicate more future return of capital to shareholders in the form of dividends.

Their large and growing commitment to advice and wealth management is supported by strong
demographic trends. The following slide represents the growth opportunity that they believe this
segment offers.

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The company believes that they are well positioned to participate in the long-term growth opportunity
that advice and wealth management offers. Not only do they hold leadership positions in most of the
important categories of advice and wealth management, their nationally-recognized branding from
American Express is a huge competitive advantage. For additional insight into the growth opportunities,
the reader can follow this link to the company’s full presentation.

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Ameriprise: Potential Risks to Future Growth

Ameriprise has a healthy balance sheet, and generates strong cash flows. However, since much of the
revenues on their largest business segment (advice and wealth management AWM) are fee-based,
they are vulnerable to a major market correction if one were to occur. There are two potential problems
that a market correction or a recession could cause. Since these are based on assets under
management, a large drop in equity prices could reduce them significantly, at least temporarily.
Simultaneously, a weak market could instigate clients leaving.

Although I believe that Ameriprise is well-positioned for long-term growth, equity price volatility does
pose a short-term risk, as evidenced by their most recent financial report. Although their business
grew, according to their first-quarter fiscal 2015 financial report, results were lowered by a negative
impact from foreign exchange, a decline in net investment income, and lower activity due to market
volatility. I believe that the current drop in their stock price as a result has created a sound buying
opportunity.

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Although the company has a strong base of assets under management, it is heavily exposed to equities
as evidenced by the following slide. This risk is partially offset by the company’s reputation and
commitment to building strong client relationships. Their recent $1.2 billion acquisition of Columbia
Management from Bank of America added significant size and scale to their Threadneedle Investments
management arm.

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In spite of the risks cited above, Ameriprise CEO Jim Cracchiolo, a long-time employee of the
company, is quite confident about the company’s growth prospects as indicated by the following
comments:

“Growth Prospects

Number one is, we've invested, over the last number of years, hundreds of millions of dollars to build
and enhance our capabilities, our technology, our online activities. And so we think that, for what we've
invested in the platform capabilities, that will continue to help our advisors become even more
productive, to attract and maintain their relationships and deepen those relationships with clients.

We also think that the positioning that we have in the market really around financial advice, our
Confident Retirement approach, and what we're going to be launching next year is our confident wealth
builder approach, which is helping people who are accumulating for retirement, and then transitioning
ultimately where our Confident Retirement approach is today, is well-suited for what the consumer is

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looking for.”

Summary and Conclusions

Ameriprise slightly missed their earnings estimates for the first quarter of fiscal 2015, and the stock
has dropped over 3%. However, their return on equity increased to a record high 23.1 % and operating
earnings were up 7%. Management appears to remain confident about the future as evidenced by the
raising of their quarterly dividend 16% to $0.67 per share. Consequently, I consider the recent
weakness an excellent opportunity for long-term oriented investors desirous of earning an above-
average total return.

Disclosure: Long AMP at the time of writing.

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