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Is AMP a buy?

Short-term hiccups can make for great buying opportunities.  The key of course is to be sure the hiccup is just that – short-term and not something more life threatening.

This very scenario could have recently just occurred at wealth manager AMP (ASX: AMP). When AMP updated the market at the end of June that it was experiencing some weakness in its wealth insurance division, the stock fell 15%. Since then other insurance market participants and commentators have highlighted some headwinds in the sector, however now that the dust has settled investors should be evaluating what the new information means for the long-term earnings power of AMP.

Given AMP’s large market share, it won’t escape these headwinds — as the downgrade has proved — however, in terms of the long-term profitability of one of Australia’s largest financial service providers, it is unlikely to become a major inhibitor to its long-term earnings ability.

With that in mind, as the chart below shows, the recent dip in AMP’s share price which has led the stock to underperform relative to its peers. This could have created an attractive opportunity for investors to purchase a blue chip company.

In the past 12 months the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) is up 21%; AMP, meanwhile, is up 20% which at first glance may appear to be an acceptable performance. However, in terms of relative performance, AMP is underperforming many in its peer group. For example, Perpetual (ASX: PPT) with its significant leverage to financial market has steamed over 75% higher, while IOOF (ASX: IFL) and Challenger (ASX: CGF) are both up over 30%

AMP

Source: Google Finance

Foolish takeaway

While Perpetual trades on a forecast price-to-earnings (PE) ratio of 23.2 (for financial year 2013 according to Morningstar) and IOOF trades on 17.4 times, AMP is trading on just 15.3 times. This looks comparatively more appealing and also comes with a dividend yield of over 5%.

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Motley Fool contributor Tim McArthur owns shares in Perpetual.

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