The last year has been a disappointing one for investors in AMP Limited (ASX: AMP), with the wealth management company recording a fall in its share price of 10%. While this is better than the 12% fall of Westpac Banking Corp's (ASX: WBC) shares and the 13% fall of Commonwealth Bank of Australia (ASX: CBA), it is nevertheless worse than the ASX's fall of 3%.
However, I think that the following three catalysts could help to turn around AMP's performance and allow it to make a comeback over the medium to long term.
Strategy
AMP's profitability is set to be given a major boost by the company's business efficiency program. Although it has required an upfront investment of $320 million, AMP expects to achieve $200 million in pre-tax recurring run rate cost savings by the end of the current fiscal year.
Further, its strategy is also focused on growth as well as cutting costs. AMP is attempting to differentiate itself from peers in a competitive space through initiatives such as an enhanced digital strategy, as well as new call centre technology which will help to improve the customer experience and enhance customer loyalty. And with AMP's financial adviser network contributing around one in four of all new mortgages in the 2015 financial year, AMP's investment in that space is also set to positively catalyse profitability and, potentially, its share price.
Foreign expansion
AMP's 20% stake in China Life Pension Company and AMP Capital's 15% stake in China Life AMP Asset Management Company hold great growth potential for AMP in my view. That's because financial product take-up in China and other emerging markets in Asia is relatively low. With growth in wealth set to rise in those economies in future years, this could be a key growth area for AMP.
For example, incomes in China are set to rapidly rise so that 75% of urban dwellers are earning between US$9,000 and US$34,000 per annum by 2022. Further, discretionary spending (which includes financial services products) is forecast to rise at an annualised rate of 7% over the next four years in China.
Financial strength
At a time when many investors are nervous about the domestic and global macroeconomic outlook, AMP's balance sheet strength will help to differentiate it from its financial services peers in my opinion. For instance, AMP holds $2.5 billion in capital above minimum regulatory requirements, which should allow it to pay out a high proportion of profit as a dividend each year.
In fact, AMP is aiming for a payout ratio of 70%-90% of underlying earnings. With interest rates forecast to fall by 25 basis points in the next year, this commitment to a high and sustainable dividend could boost demand from yield-hungry investors – particularly when AMP yields 5% versus 4.2% for the ASX.
