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.

| More on:
AMP share price a hand drawing a balancing scale in which price outweighs value

Image source: Getty Images

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.

Wondering where you should invest $1,000 right now?

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for over ten years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes could be the five best ASX stocks for investors to buy right now. These stocks are trading at near dirt-cheap prices and Scott thinks they could be great buys right now.

*Returns as of January 12th 2022

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.

More on Cheap Shares

Woman on her laptop thinking to herself.
Retail Shares

Are these 2 small ASX shares too cheap to ignore?

Some cheap ASX shares could offer opportunities. Let's take a look.

Read more »

Two kids are selling big ideas from a lemonade stand on the side of the road for cheap!
Cheap Shares

2 cheap ASX shares to buy right now: experts

JB Hi-Fi and Accent are two ASX shares with low valuations.

Read more »

Woman looks amazed and shocked as she looks at her laptop.
Cheap Shares

2 ASX shares at ‘appealing’ buy prices right now

Stock markets have been in turmoil this year, especially the past month. Here are a couple of bargains worth considering.

Read more »

cheap stocks represented by open brief case with golden light shining from it
Cheap Shares

2 cheap ASX shares to buy in May: Experts

Adairs and Best Buy are two ASX shares that have low p/e ratios, which experts rate as buys.

Read more »

three young children weariing business suits, helmets and old fashioned aviator goggles wear aeroplane wings on their backs and jump with one arm outstretched into the air in an arid, sandy landscape.
Broker Notes

48% fall: Fund names 3 ASX shares to take off after heavy crash

Many non-mining stocks have been hammered this year, but that could mean there are some bargains waiting to skyrocket.

Read more »

two dogs, a golden one and a black one, together carry a stick in their mouths as the run side by side with contented, happy looks on their faces.
Broker Notes

2 ASX shares that were dogs last month but good to buy now: expert

The team at Celeste Funds Management is keeping the faith in this pair of stocks despite their horrible underperformance in…

Read more »

two smiling people, a man and a woman, raise a hand in a wave as they are tethered to each other while they skydive against a clear sky with a covering of clouds below before their parachute opens.
Broker Notes

It’s time to buy these 2 fallen ASX shares again: expert

One professional has named a pair of beaten-down stocks he that thinks is ready for a massive rebound.

Read more »

A older man and younger man rest, exhausted but happy after a good boxing session.
Growth Shares

Is it time to buy these 2 beaten-up ASX shares in April 2022?

These two ASX shares have dropped heavily, so, are they opportunities?

Read more »