Despite a Dividend Hike, Ameriprise Stock Drops, Giving Value Investors a Buying Opportunity

Ameriprise Financial (AMP) reported excellent underlying financial news for Q1 on April 24 and raised its dividend by 8% to $1.35 per share. But AMP stock is faltering, providing a unique buying opportunity for value investors.

For example, the financial wealth management company stock is down almost 6% on April 25 to $294.52. Given its new annual dividend of $5.40, that puts the dividend yield at 1.83%. This is significantly higher than its average yield of 1.60% in the last year and 1.47% in 2021. 

In fact, at an average rate of 1.55%, AMP stock would trade at $348.39 per share (i.e., $5.40/0.0155). That implies AMP stock could rise by 18.3% from today's price.

Moreover, analysts now project AMP will make $30.56 in earnings per share (EPS) this year. That puts it on a cheap multiple of just under 10x (9.56x). This is well below its historical average of 11x in 2022 and 12.3x in 2021, according to Morningstar. That means AMP stock could be worth as much as $375.89 per share based on the 2021 multiple.

So, averaging these two metrics, we can give AMP stock a reasonable price of $362.14, or 23% over today's price.

Selling Covered Calls to Out-of-the-Money Puts for Extra Income

Enterprising investors can take advantage of this weakness by either selling covered calls or out-of-the-money (OTM) puts. This can bring in extra income while the investor waits for AMP stock to move up to this price target.

For example, for the May 19 expiration period, the $350 strike price calls trade for 20 cents. That will provide investors who own the underlying shares (at least 100 shares per call contract shorted) an income yield of 7 basis points. On an annualized basis, assuming this is repeated each month for a year, the investor can make an extra 0.81%. This is on top of the 1.83% annual dividend yield, or 2.64% in total.

A more enterprising investor might wish to sell covered calls at the $230 strike price. These trade for 43 cents and provide an annualized yield of 1.75%. That raises the total yield return to the investor of 3.58%.

Another way to create extra income with AMP stock is short OTM cash-secured puts. For example, an investor who has delivered $26,000 in cash and/or margin to their brokerage firm can enter in an order to short the $260 strike price puts. This is 12% below today's stock price and provides plenty of downside protection, in case the stock falls more from today's price. 

In return, the investor will receive $90 in their account, as the put premium at this strike price trades for 90 cents at the midpoint. That is significantly more income than OTM-covered calls. 

This premium divided by the $260 strike price provides a yield-to-strike of 34.6 basis points for the month and an annualized rate of 4.15%. This is an excellent return for most investors and also provides a chance to buy in at a much cheaper price. 

The bottom line is that value investors in AMP stock are now finding it is a unique value-buying opportunity. Moreover, they can short out-of-the-money covered calls or cash-secured puts to create extra income for the long term.

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On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.