3 reasons why I’m steering clear of AMP Limited

AMP Limited (ASX: AMP) is one of Australia’s largest financial service companies with a market capitalisation of $13.4 billion.

On the face of it, AMP has multiple divisions in its business that could be successful, yet it hasn’t produced solid results.

For example, it owns or part owns a number of quality assets such as Melbourne’s airport. Asset management is a large division of AMP’s business and Macquarie Group Ltd (ASX: MQG) has shown that asset management can be a profitable area if done well.

AMP is a large provider of superannuation and wealth services. Rival superannuation businesses Challenger Ltd (ASX: CGF) and BT Investment Management Ltd (ASX: BTT) have produced good performances from the superannuation alignment.

AMP is also one of the bigger insurers in Australia, which has worked pretty well for Suncorp Group Ltd (ASX: SUN) and Insurance Australia Group Ltd (ASX: IAG), but AMP hasn’t been producing comparable results.

Australia has had 25 years of consecutive growth, with a large rise in loans, which has really helped the big four banks. AMP’s banking division has done reasonably well here, but nothing spectacular.

These are all good areas that AMP could thrive in and other businesses have proved it’s possible to make good profits in these financial sectors, however AMP’s overall business hasn’t done well. The following three reasons are why AMP isn’t going to be in my portfolio any time soon.

Poor performance

In its latest results AMP revealed that its underlying profit was down from $570 million to $513 million, a drop of 10%.

Considering Australia isn’t going through a recession at the moment, this is quite disappointing. AMP has its finger in so many financial pies and yet it can’t seem to find consistent growth. AMP is currently trading at 13.3x FY16’s earnings, which still isn’t that cheap considering Commonwealth Bank of Australia (ASX: CBA) is performing better and trading at 13.7x FY16’s earnings.

Focused on the wrong strategy

AMP, the big four banks and IOOF Holdings Limited (ASX: IFL) have recently been criticised because their financial planners have been referring clients to their parent bank’s products. This is great for generating commissions, but not for the client.

If AMP instead focused on giving clients good quality products for good value, it would retain a much larger percentage of its customer base, attract more funds under its umbrella and earn increasing management fees each year.

Poor dividends

AMP’s inconsistent performance has led to an inconsistent dividend. I like businesses that are able to increase profits and dividends every year. Sadly AMP has not managed to do this.

AMP is trading with a partially franked dividend yield of 6.22%.

Foolish takeaway

As Foolish investors we should always be on the lookout for high-quality companies that produce good results year after year and AMP has disappointed shareholders far too regularly for my liking.

Perhaps AMP may turn it around one day, but I doubt it will happen any time soon. I think that Foolish investors looking for diversification in the financial sector would be better off looking at Challenger and BT Investment Management.

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Motley Fool contributor Tristan Harrison owns shares in Challenger Ltd. 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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