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3 reasons why AMP Limited may now be a buy

AMP Limited (ASX: AMP) is one of Australia’s leading providers of financial planning advice, wealth management services and income insurance products. Boasting a market capitalisation of $15.58 billion, it forms part of the ASX’s top 20 companies.

Like its other financial services peers, AMP is well positioned to profit from rising equity markets, higher world income growth and favourable legislation on higher superannuation contributions.

While it has gained a fair bit these past couple of months, AMP has consistently underperformed the market in the past few years, providing a 10-year shareholder return of only 5%. This relatively weak share price performance can be primarily attributed to poor management, which led to the questionable multi-billion dollar acquisition of AXA in 2011 and mispricing of its wealth protection products.

However, picking up beaten-down stocks can be a lucrative strategy for investors, if a company has potential long-term tailwinds. Here are three reasons why I think AMP will soon make up for its losses and start creating wealth for its shareholders.

1. International Expansion

Taking advantage of growth opportunities in high growth Asian economies can be a very exciting prospect if executed correctly. AMP has recently formed a fund management joint venture in China. I think this venture is a smart move in order to leverage off China’s rapidly growing wealth management sector. The venture is also a stepping stone for the giant to take advantage of other opportunities in the promising Asian market.

International expansion also allows companies like AMP to gain more diversity in its revenue base and profit from Asia’s growing pension pool and rising population, providing it with exceptional long-term earnings drivers and a boost in global market share.

2. A stronger global economy will raise demand for its products

Given the fact that equities markets are performing exceptionally well and are set to continue rallying, AMP will start benefiting from higher management fees as it grows the volume of funds it manages. Furthermore, its dominant market share in the financial planning sector means that as superannuation contributions rise, AMP will be well positioned to benefit.

3. Short-term troubles are gradually fading

The major cause of AMP’s underperformance has been a result of an increase in claims paid out on its income protection products. This mispricing is not entirely uncommon for insurers and a lack of forecasting measures is to blame. However, since then management has done everything it can to learn from its mistakes and revive its Wealth Protection business.

Despite trading on a relatively hefty price-to-earnings ratio of 23, AMP does seem to offer some exciting growth prospects that have the potential to drive its earnings in the future. It’s important to note that AMP does come with its fair share of risk and is not for the feint hearted investor.

AMP’s growth endeavours are promising and I think it’s starting to move towards a brighter future by putting the past behind it. I think AMP is a share that’s definitely worth adding to your portfolio.

An even better investment opportunity...

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This little known ASX company has already delivered eight consecutive years of profit and dividend growth... but with even more growth ahead, the shares are still a firm "BUY" today! Discover The Motley Fool's #1 dividend pick in our newly updated report. Simply click here for your FREE copy right now.

Motley Fool contributor Aryan Norozi does not own shares in any of the companies mentioned in this article.

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