AMP Limited – buy it now and don’t ever let it go

The best time to buy stocks is when they are temporarily out-of-favour.

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Despite being one of the largest financial services providers in Australia, AMP Limited (ASX: AMP) has struggled to provide respectable returns to shareholders over the past five years. Indeed underlying earnings per share (EPS) have actually declined from 38.3 cents per share (cps) in 2009 to 28.8 cps in 2013. Likewise the dividend has fallen and the share price has eked out a gain of just 9% compared with a gain of 45.6% from the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO).

These historical returns are far from flattering and the multi-billion dollar acquisition of AXA in 2011 certainly looks questionable. On top of the potential value destroying AXA acquisition, AMP’s insurance division has recently been battered by the misprcing of its wealth protection products – an industry wide problem.

Despite these negatives there are reasons for shareholders and investors to take a more positive view on AMP’s future potential. The firm’s underlying return on equity (ROE) has declined from 31.6% in 2009 to a meagre 10.7% in 2013 – this level is obviously sub-par for a funds management and insurance company and suggests that better returns could lie ahead if management can restore ROE to more satisfactory levels.

Secondly, like its peers IOOF Holdings Limited (ASX: IFL) and BT Investment Management Ltd (ASX: BTT), AMP is well placed through its market-leading financial advisory network to continue to attract superannuation money. This is a massive tailwind that investors should want to get exposure to.

With the shares trading on a forecast FY 2015 price-to-earnings ratio of 14.4, now could be a great opportunity for investors to add one of Australia’s largest integrated funds management and financial services businesses to their long-term portfolio holdings.

Motley Fool contributor Tim McArthur owns shares in BT Investment Management Ltd.

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