Why I think the AMP share price is finally looking good enough to buy

The AMP Limited (ASX: AMP) share price is one of the highest risk buys on the ASX. But it’s never looked more attractive in the past 3 years.

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AMP share price a hand drawing a balancing scale in which price outweighs value

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The AMP Limited (ASX: AMP) share price seems like one of the highest risk stocks to buy on the S&P/ASX 200 Index (Index:^AXJO). But the scandal-plagued company could provide a good payoff for the brave.

I initially refused to touch this ASX stock as it jumped from one crisis to another, but decided last week it was time to after chairman David Murray resigned.

AMP has been a real dog with the stock trading close to $6 in 2016 to around $1.66 today. The bad taste from the Banking Royal Commission that claimed Murray’s predecessor Catherine Brenner had barely left our mouths when the Boe Pahari controversy erupted.

AMP will become the quintessential case study on how NOT to manage a crisis.

Deal breaker

If I have one firm rule when it comes to investing, it’s never to touch stocks with governance or accounting issues. History taught me that I always get burnt by seemingly “cheap” stocks being sold on either of these interconnected blemishes.

I am happy to stomach other business risks, such as technology or market risks, as I can made an educated assessment on such threats. But there’s a thick cloud of uncertainty when it comes to governance that will always blind investors.

As far as I am concerned, you are rolling the dice if you buy such stocks. The same can be said for accounting issues as I see the two as often being interlinked.

When to start looking at ASX dogs again

The only time I become interested again is after a big cleanout, like what just happened at AMP. Real change can only happen under new leadership.

This isn’t reason enough to buy the AMP share price, but it at least means I am not wasting my time working out its fair valuation.

And AMP share price looks cheap given the amount of bad news priced into the stock and considering the strategic value of its brand.

Strategic value

Remember that this was once an attractive takeover target, just ask National Australia Bank Ltd. (ASX: NAB). Things have radically changed since 2003 and AMP is a much easier target now.

This is why it didn’t surprise me that its newest chairperson Debra Hazelton confirmed AMP was approached by several parties.

The question is how much AMP might be worth under a break-up.

How much is a broken up AMP worth?

The analysts at JPMorgan tries to answer this question by considering two probable scenarios, according to the Australian Financial Review.

In the first instance, the broker assumed that AMP’s wealth management business (the biggest prize bidders are after) is sold on the same 16 times post-tax earnings multiple that IOOF Holdings Limited (ASX: IFL) is paying NAB for MLC.

On that basis, AMP’s shares are worth $1.94 a share.

Less optimistic scenario still delivers good returns

In the second scenario, JPMorgan assumed AMP’s wealth division would be valued using MLC’s funds under management margin as a proxy.

Under this assumption, AMP’s valuation will come in at $1.81 a share. This implies a 15% upside to the stock but doesn’t include the 10 cents a share special dividend.

Don’t forget your special dividend

This dividend represents one part of a capital return to shareholders following the sale of AMP Life. Management is also undertaking an up to $200 million on-market share buyback over the next 12 months.

AMP is still a higher risk proposition, but I think the risk-reward has not looked this attractive in the last three years, if not longer.

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Motley Fool contributor Brendon Lau owns shares of AMP Limited and National Australia Bank Limited. Connect with me on Twitter @brenlau.

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 Scott Phillips.

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