AMP Limited (ASX: AMP) could prove to be a recovery stock in my view. It has fallen by 10% in the last month which is behind the performance of financial services peers such as Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd. (ASX: NAB). They have risen by 8% and 6% respectively. However, I believe AMP's share price could rise over the medium to long term for these two reasons.
Strategy
AMP's strategy is simple but could prove to be highly effective. It has successfully streamlined its business in order to become more efficient. For example, AMP has largely completed a programme which will contribute $200 million in pre-tax run rate savings by the end of the 2016 financial year. This will more than offset the investment which AMP has made in growth initiatives and in my view will boost the company's return on equity (ROE) after it dropped 160 basis points to 11.9% in the first half of the 2016 financial year.
Alongside cost-cutting, I feel that AMP's profitability will benefit from its growth strategy. For example, it has pivoted towards higher growth, less capital intensive businesses where it has a dominant market position. This will improve its growth rate but also reduce its risk profile in my view, since AMP has a competitive advantage over its rivals in segments such as financial advice, wealth management and self-managed superannuation funds.
Further, through a focus on the customer experience, I feel that AMP could enjoy improved customer loyalty as well as potentially higher margins over the medium term. For example, it will provide greater digital and direct channels for customers which should improve product cross-selling.
Growth potential
As well as opportunities to improve its business in core markets such as Australia and New Zealand, AMP's recovery will be led by its international growth prospects in my view. Although operating in China is an obvious move for most financial institutions due to rising wealth and low financial product penetration, I believe that AMP has an advantage over a number of its rivals.
The key reason for this is its 19.99% stake in China Life Pension Company (CLPC) and 15% stake in China Life AMP Asset Management (CLAMP). The former is the second-biggest provider of investment management services in China and the largest trustee services operator in China. This dominant position could equate to higher margins and relatively stable growth for AMP in China in my opinion.
AMP also has the financial standing to press on with ambitious growth plans on the international stage. Its level 3 eligible capital resources at 30 June 2016 were $1.9 billion above minimum regulatory requirements. Its access to significant liquidity means that a dividend payout ratio of 70%-90% is affordable in my opinion without sacrificing investment in its strategy and long term growth outlook.