Royal Commission: Why the AMP Limited share price is falling

Bargain hunters should hang on to their horses. AMP Limited’s (ASX:AMP) valuation hasn’t been this attractive for a long while but that alone is unlikely to stop the stock from stating under pressure. Here’s why.

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The share price of AMP Limited (ASX: AMP) has tumbled to a one-and-a-half year low as the wealth manager finds itself in the same dog house as the unloved big banks.

The stock crashed 3.4% to $4.60 during yesterday’s trade as investors rushed for the exits after hearing the company confess to lying to the Australian Securities and Investments Commission (ASIC) and charging clients for services it didn’t deliver.

I can see further downside to the stock price even if valuations for the stock have never been this good for years.

It was prescient that Perpetual Limited (ASX: PPT) reportedly exited the share register a little before the confession to the Banking Royal Commission. Shareholders should have taken their cue from Perpetual given that Perpetual is known to be a value investor.

I think a new big risk for AMP comes from lawsuits. I suspect there are already a number of law firms putting together a class action against AMP – and it might not only be clients of AMP calling for blood. Shareholders too may want compensation.

We’ve already seen a few class actions brought against Commonwealth Bank of Australia (ASX: CBA) by shareholders suing for alleged non-disclosure violations and the Royal Commission has only kicked off less than two months ago.

Other big banks like Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd. (ASX: NAB) and Australia and New Zealand Banking Group (ASX:ANZ) are probably going to face their own day of reckoning as well when the Royal Commission hands in its final report (if not before!).

At least AMP doesn’t have to contend with growing headwinds in the mortgage market that is threatening to put the banks on an earnings downgrade cycle.

Nonetheless, AMP will be sitting in the sin bin for a while I suspect. Who would buy the stock at this price with so much hanging over the company?

Ignore the fact that AMP is trading on a consensus FY19 price-earnings multiple of 12.5 times and has a juicy full franked yield of over 6%. The P/E is on par with Commonwealth Bank and AMP typically trades at a premium to the bank.

This means the de-rating for AMP has been harder than Australia’s largest bank by market capitalisation!

But that alone isn’t likely to help the stock bottom. The valuation argument alone generally can’t pull stocks with big governance issues out of their funk and AMP could be facing its own downgrade cycle as clients may now be looking elsewhere to get investment advice.

That could leave AMP’s rivals like IOOF Holdings Limited (ASX: IFL) smiling as long as they can keep their noses clean.

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Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, National Australia Bank Limited, and Westpac Banking. The Motley Fool Australia owns shares of National Australia Bank Limited. 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 Scott Phillips.

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