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Is AMP Limited at bargain prices?

News that AMP Limited (ASX: AMP) is looking to sell hybrid securities to raise cash to bolster its capital adequacy ratio comes as a relief to shareholders.

This wouldn’t have been the time to sell new shares to raise capital given that the wealth manager has already shed 15% over the past month to an eight-month low of $5.63 this morning. An equity raising would have depressed the share price further.

Management has instead opted to look at an ASX-listed hybrid issue to bolster its tier-1 capital ratio, according to the Australian Financial Review.

AMP has a banking license and is subject to the higher ratio requirement imposed by our banking regulators to protect key financial institutions from an external shock, such as a possible collapse in the housing market.

The hybrid issue would be the fourth issued by financial institutions this year with Westpac Bank Corp (ASX: WBC), Australia and New Zealand Banking Group (ASX: ANZ) and National Australian Bank Ltd. (ASX: NAB) selling close to $4 billon of such securities.

AMP sold $275 million of its AMP Wholesale Capital Notes issue to institutional investors in March but the potential upcoming hybrid issue will be sold to retail investors hungry for yield. The hybrids are rumoured to be priced at 500 basis points (five percentage points) over swap – or 100 basis points more than the wholesale notes.

I believe there’s an unmet demand for listed hybrids and I suspect the issuance will be very well received by the market. The total amount of hybrids to be sold has not been revealed.

Notwithstanding the market turmoil, which typically hurts wealth managers more than most other financial stocks, I am bullish on the sector as I am expecting a reasonably significant rally in the market towards the end of the year.

AMP is one stock in the sector I own as I believe it is attractively priced as it trades on an undemanding consensus price-earnings (P/E) multiple of 14x for 2016 (its financial year ends in December), which is right at the bottom of its five-year P/E range.

What’s more, the stock is yielding around 8% if franking credits are included and its half year result that was released last month has been well received by analysts who have commended management for its 12% underlying net profit increase as all of its divisions performed well.

It’s hard not to be impressed as AMP has strong cost control, a healthy balance sheet and good diversification across the wealth management space.

There’s also ongoing speculation of further consolidation in the sector and I won’t be surprised if AMP’s name is mentioned again.

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Motley Fool contributor Brendon Lau owns shares of AMP Limited and National Australia Bank Limited. Follow me on Twitter - https://twitter.com/brenlau

Unless otherwise noted, the author does not have a position in any stocks mentioned in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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