Ameriprise Remains On the Sidelines - Analyst Blog

By Zacks | July 10, 2012 AAA

We have reiterated our 'Neutral' recommendation on Ameriprise Financial Inc. (AMP), based on its consistent capital deployment activities and better-than-expected first quarter results. However, increasing expenses, prevailing low interest rate environment and the ongoing outflows related to the integration of Columbia Management will keep the company's financials under pressure.

Ameriprise has been growing organically as well as through acquisitions. In May 2010, the company acquired the long-term asset management business of Columbia Management from Bank of America Corporation (BAC). This acquisition has significantly pushed up the performance of Ameriprise's retail mutual fund and institutional management businesses. In 2012, the company expects net synergies of about $145 million from the acquisition. We believe that the company will continue to restructure its business operations with an aim to remain profitable by focusing on its core business.

Moreover, Ameriprise is an asset for yield-seeking investors. In April, the company increased its quarterly cash dividend by 25% to $0.35 per share. This follows a 22% dividend hike in the fourth quarter of 2011. This is the sixth dividend rise for the company since 2005. Also, the company continues to buyback shares. Overall, during the first quarter, it returned $364 million to its shareholders in the form of share repurchases and dividends. We expect management to continue enhancing shareholders' value in the future as well.

Further, Ameriprise operates a well diversified portfolio compared with its peers. The company designs its products and services keeping in mind the investors' needs and to further enhance revenue growth. Hence, going forward, maneuvering new products with the existing portfolio will facilitate the top-line growth of the company.

On the flip side, Ameriprise operates in a highly competitive industry where brand name and market sentiments also play an important part in deciding the growth in sales, net inflows and managed assets. Given the current modest economic recovery and the European debt crisis, outflows can occur anytime, reducing demand and management fee revenues plus impeding benefits from economies of scale.

Additionally, continuously rising expenses is a major cause of concern for Ameriprise. In 2011, total expenses amounted to $8.8 billion compared with $7.9 billion in 2010 and $6.5 billion in 2009. Higher distribution expenses, general and administrative expenses as well as increased interest and debt expense resulted in elevated expenses during the year. Though the advertising campaign and technology upgrades will be beneficial for Ameriprise in the long run, rising expenses may prove harmful for its profitability.

Ameriprise currently retains a Zacks #3 Rank, which translates into a short-term 'Hold' rating.
 

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