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AMP Limited shares surge on dividend boost: Should you buy?

What: Shares in wealth management group AMP Limited (ASX: AMP) surged to a 12-month high on Thursday after the company reported a 16% increase in underlying profit buoyed by success in an overseas expansion and the group’s improving insurance business.

So What: The upbeat result beat analysts’ expectations and broke a worrying trend of AMP failing to hit guidance over the past 24 months. The company’s insurance business, which has been the cause of most problems, saw a 50% rise in profit in the first half to $91 million from $64 million in the previous corresponding period.

Expectations of improving conditions have seen AMP shares rise 20% over the past 12 months, doubling the 10% return from the ASX 200. Investors and analysts have been particularly excited about the increase in interim dividend from 11.5 cents last year to 12.5 cents this year, representing a payout ratio of 73% of underlying earnings.

Importantly for some investors and customers, the group also announced an overhaul of its financial planning business in order to combat the recent decline in sentiment towards the sector. Scandals involving key competitors have damaged consumer confidence in planners and their motives to the point where AMP believe it is necessary to increase the qualifications of financial planners, introduce a complaints panel and work towards developing an improved code of ethics.

What Now: Assuming that AMP can deliver similar underlying earnings per share in the second half of the year, the company is currently trading on a forward price to earnings ratio of nearly 17 and dividend yield of 4.4%, 70% franked.

AMP’s yield and price to earnings ratio compares favourably with rivals, however it requires the company to deliver another solid six months of earnings growth above 15%. CEO Craig Meller was optimistic about the next six months and noted the success being seen in the group’s partnerships with companies in China and Japan. Diversification of earnings into Asia could be a significant growth driver over the next three to five years.

A value price tag + growth + big dividends!

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Motley Fool contributor Andrew Mudie does not own shares in any companies mentioned. You can find Andrew on Twitter @andrewmudie

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