With Quiver Quantitative’s recent institutional holdings data, we can see that several hedge funds and asset managers have been increasing their holdings in Ameriprise Financial Inc. (NYSE: AMP). Firms such as Nuveen Asset Management, Balyasny Asset Management, and JP Morgan Chase have all added to their AMP positions recently. Most notably, Nuveen Asset Management increased shares held by nearly 30% (as filed on 6/30), bringing their total AMP holdings to 1,673,748 shares worth around $562.6 million dollars at current share prices. With this in mind, we took a closer look at some of the reasons why many investors may be bullish on Ameriprise Financial.
In July, Ameriprise Financial reported strong second quarter earnings results. Assets under management (AUM) reached $1.3 trillion dollars, up 9% due to strong market performance within the first half of 2023 and strong client net inflows. Second quarter adjusted operating earnings per diluted share was $7.44, up 30% YoY driven by strong business performance in the Wealth Management business segment, with second quarter GAAP net income per diluted share coming in at $8.21, up nearly 53% YoY. Additionally, Ameriprise Financial returned $638 million dollars to shareholders in the quarter, representing 79% of adjusted operating earnings. During the quarter, Ameriprise Financial also announced a new share repurchase authorization of $3.5 billion dollars through September 2025, while also announcing strong ROE figures of 51% during the quarter, further displaying the business’ superb capital allocation priorities that align well with shareholder interests. With these strong second quarter earnings results in mind, we believe that Ameriprise Financial is a compelling business trading at a fair valuation.
Wealth management is Ameriprise Financial’s primary growth engine, as management acknowledges the significant market opportunity within the wealth management space. Management says that they are in a compelling position to capitalize on significant demographic and market trends that are increasing demand for wealth management solutions. With baby boomers transitioning into retirement, and with Generation X and Millennials beginning to plan for retirement, there is significant demand for financial advice and wealth management solutions, providing strong tailwinds for Ameriprise Financial’s wealth management business. Furthermore, the amount of investable assets held by investors with $500,000 or more is expected to rise 3-5% annually, adding credence to the point that there is significant upside in the wealth management business. Ameriprise Financial’s network of over 10,000 financial advisors, among the largest in the industry, allows them to have an industry-leading position in the wealth management industry. This channel of over 10,000 financial advisors is the primary channel Ameriprise Financial uses for their wealth management service offerings, offering financial planning and advice, cash management and banking products, and full-service brokerage services.
As a diversified financial services firm, Ameriprise Financial competes with a host of financial institutions in a highly competitive market. These financial institutions include registered investment advisers, asset managers, securities brokers, banks, and insurance companies. Management acknowledges that some of their competitors offer mobile or web-based financial services and discount brokerage services, often with much lower levels of service to their clients. The business’ wealth management segment competes with securities broker-dealers, independent broker-dealers, financial planning firms, registered investment advisers, securities brokers, asset managers, banks, and insurance companies. Not only does Ameriprise Financial compete with these firms in terms of wealth management strategies, they also compete with them for talent as well. To ensure a quality pool of financial advisors, Ameriprise Financial offers a strong brand name recognition, competitive compensation structures, products offerings, and technology and support capabilities. The business’ asset management segment also competes with similar firms, and management acknowledges that they compete with these competitors on an array of competitive factors like fee structures, product ratings and offerings, technology and service quality, brand reputation, and the ability to retain investment personnel.
Management is solid and their capital allocation priorities align well with shareholder interests. In 2022, Ameriprise Financial repurchased 6.6 million shares of common stock at an average price of $282.33 dollars per share. In 2021 and 2020, Ameriprise Financial repurchased 7.1 and 8.4 million shares, respectively, for an aggregate cost of $1.8 billion dollars in 2021 and $1.3 billion dollars in 2020. Management plans to fund future share repurchases through existing working capital, future earnings, and other customary financing methods. In addition to share repurchases, Ameriprise Financial pays out quarterly dividends to shareholders, totaling $553 million and $527 million dollars for 2022 and 2021, respectively. In January, Ameriprise Financial announced a quarterly dividend of $1.25 per common share. As we can see, management has superb capital allocation priorities, returning value to shareholders via aggressive share repurchases and dividends.
In terms of incentives, management is incentivized well with a compensation structure that aligns management and shareholder interests. In 2022, Ameriprise Financial CEO James Cracchiolo had 5% of his total compensation paid out as a cash base salary, with the rest of his total compensation (95%) being variable pay. Outside of the 5% cash base salary, 25% of his total compensation for 2022 went towards an annual cash incentive, with 15% coming from non-qualified stock options, 20% from restricted shares, and 35% from performance share units (PSUs). With a majority of NEO total compensation coming from variable pay, management and shareholder interests are well aligned, especially given the fact that a lot of the variable pay is paid out in the form of equity. This equity build-up that NEOs receive in their total yearly compensation allows for them to have skin in the business, further aligning management and shareholder interests while retaining executive leadership and talent.
Ameriprise Financial is a very capital efficient business. Ameriprise Financial operates at a LTM ROE of 57.9% and a LTM ROIC of 50.5%. With a WACC of 10.4%, Ameriprise Financial operates with a ROIC to WACC ratio of around 4.9x, showcasing the business’ ability to generate returns far greater than their weighted average cost of capital, or hurdle rate. With such a high ROIC to WACC ratio, Ameriprise Financial is able to reinvest cash back into the business at high rates of return, rapidly compounding intrinsic value and handsomely rewarding shareholders. Looking further at efficiency metrics, we can see that ROIC has increased handsomely since 2013. In 2013, Ameriprise Financial operated with a ROIC of 21.9%, whereas the business operates with a LTM ROIC of 50.5% today. Evidently, Ameriprise Financial holds a strong competitive advantage within their sector, with ROIC increasing incrementally over the decade.
Analyzing Ameriprise Financial’s income statement, we can see some decent sustained growth in revenue, gross profit, and earnings throughout the last decade. Since 2013, Ameriprise Financial has grown revenue at a CAGR of 3% (largely in line with US GDP growth), with gross profit at a CAGR of 2.5% in that same time period. Ameriprise Financial operates with relatively high margins, operating at a LTM gross margin of 52.1%, and a 10-year gross margin average of 52% (margins have stayed relatively flat over the past decade). In terms of earnings, Ameriprise Financial has grown EBITDA at a CAGR of 2.5% since 2013, with EPS growing at a CAGR of 13% in that same time frame. The excess growth in EPS relative to EBITDA can largely be attributed to share repurchases. Ameriprise Financial is a cannibal, decreasing shares outstanding by 46% since 2013.
Looking at Ameriprise Financial’s balance sheet, we can see that the business is operating in good financial health. Ameriprise Financial has around $7.35 billion dollars worth of cash and equivalents on hand, with $263 million dollars worth of trading asset securities that brings total cash and short term investments to $7.6 billion dollars. This significant cash reserve can be compared to the business’ total debt obligations of around $4.1 billion dollars, bringing net debt to around -$3.5 billion dollars (signifying that the business had $3.5 billion dollars in excess cash compared to debt). This net debt of -$3.5 billion dollars signifies the business’ strong financial position, with excess cash exceeding the business’ debt obligations, meaning that Ameriprise Financial has plenty of runway for increased share repurchases, dividends, or reinvestments back into the business at favorable rates of return.
Looking at Ameriprise Financial’s cash flow statement, we can see stellar sustained growth in net income and free cash flow, showing the business’ operational efficiency and ability to generate cash from its revenue. Since 2013, net income has grown at a CAGR of around 6.2%, with free cash flow growing at a CAGR of 12.3% in that same time frame. The large increase in free cash flow, in relation to all of the other financial metrics covered, can largely be attributed to expanding free cash flow margins. In 2013, Ameriprise Financial operated with a free cash flow margin of 11.2% of revenue, with the business now operating with a LTM free cash flow margin of 26.7% of revenue. As we can see, Ameriprise Financial has become much more efficient at generating free cash flow from its revenue in the past few years, giving the business increased runway to increase share repurchases, dividends, or reinvestments back into the business at high rates of return, increasing shareholder value.
After conducting a reverse discounted cash flow analysis, we can see that Ameriprise Financial is trading at share prices that imply a -5.23% growth rate in free cash flow over the next ten years, using a perpetuity growth rate of 3% (largely in line with US GDP growth) and a discount rate of 10%. While Ameriprise Financial isn’t exactly a fast growing company, it grew free cash flow at a CAGR of 12.3% within the last decade, largely because of expanding free cash flow margins. If the business is able to continue to incrementally expand free cash flow margins, subsequently increasing free cash flow (assuming revenue stays flat or grows), it should be able to retain similar free cash flow growth figures, showing that this current free cash flow growth rate implied by current share prices is cheap in relation to the business’ growth potential. Additionally, with the U.S. economy showing signs of recovery from its inflationary post-covid state, the business is set up nicely to benefit from the tailwinds of a strong US economy. A 3% growth rate in free cash flow (largely in line with the business’ revenue growth over the last decade) would imply a 66.39% upside to $560 dollars per share. While there is absolutely no guarantee that the business will trade at share prices that imply this growth rate (remember, valuation is only one of many factors that affects a business’ share price), it shows that the business is currently trading at an attractive valuation.