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Why the 5.5% dividend yield of AMP Limited looks attractive

AMP Limited (ASX: AMP) shares have slipped around 0.7% in early trade on Thursday to $5.56 – at this level the stock is trading just 6% above its 52-week low price of $5.24 and trading over 18% below its 52-week high level of $6.83.

The S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) has now fallen over 8% in the past six months and with little in the way of negative company specific news, much of the decline in AMP’s share price can be attributed to the general market decline

With the financial services giant operating on a calendar year basis, investors don’t have to wait long to review AMP’s full year results.

Like other financial sector companies which have revenues exposed to equity markets such as Platinum Asset Management Limited (ASX: PTM), IOOF Holdings Limited (ASX: IFL) and BT Investment Management Ltd (ASX: BTT), AMP’s share price regularly comes under selling pressure during stock market sell-offs.

Arguably, while the near term earnings outlook is affected by equity market levels, the long term business value of these leading financial services businesses is much less affected.

Based on analyst consensus data provided by Morningstar, AMP is forecast to grow earnings per share to 41.2 cents per share (cps) in 2016, while dividends per share are expected to expand to 30.9 cps.

This forecast suggests strong earnings coverage of the dividend and importantly, based on the current share price, implies a dividend yield of 5.5%.

The only detractor from AMP’s dividend is the fact that the pay-out is not fully franked. Essentially this means investors need to receive a higher yield from AMP than they need to receive from the likes of Telstra Corporation Ltd (ASX: TLS) (all else being equal) to compensate for the fact that AMP’s dividend is not fully franked whereas Telstra’s dividend (for example) is.

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Motley Fool contributor Tim McArthur has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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