Wealth manager AMP Limited (ASX: AMP) is often cited by analysts as a quality blue chip, high dividend yielding stock, suitable for investors looking for fully franked dividends. But in AMP’s case, it’s not a true blue-chip stock, with a history of destroying shareholder value through expensive acquisitions, a practice of issuing plenty of new shares each year – which has diluted earnings per share and seen the company’s share price fall from a high of over $15 in 1998 to as low as $3.00 in 2003.
Here are three reasons why Foolish investors should avoid investing in AMP…
1) Over the past ten years, AMP has delivered a total shareholder return of just 6.1% per year according to Commsec, with the share price 5% lower than it was ten years ago. By comparison, the S&P / ASX 200 Index (Index: ^AXJO) (ASX: XJO) has returned 62% over the same time frame. For a so-called blue-chip, that’s an ordinary performance.
2) With a current P/E ratio of more than 20, and a prospective P/E ratio of 16 in 2014 for a company generating very low earnings growth, AMP is overpriced at the current price of $5.32.
3) AMP has struggled to capitalise on the massive growth in superannuation savings in Australia, suggesting the business may have grown too complex and bloated. Return on equity has fallen into high single digits, and AMP generates around 1.1% on its total assets.
An even better bet than AMP
Fund managers Perpetual Limited (ASX: PPT), Magellan Financial Group Ltd (ASX: MFG), Platinum Asset Management (ASX: PTM) all appear to be better bets than AMP at this stage, and much more likely to benefit from Australia’s growing super pile. For a better option than all of those stocks, get the Motley Fool’s favourite income idea for 2014 in our free report. Simply click here for your FREE copy of “The Motley Fool’s Top Dividend Stock for 2014.”
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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga
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