Which one to choose? A wealth management and financial planning company that does banking or a general insurer that has the fifth largest bank in Australia?
Business conglomerate Wesfarmers Ltd (ASX: WES), which operates Coles supermarkets, Bunnings Warehouse, K-Mart and Target, has been wanting to expand into financial services like loans and holding deposits. It is one big market that a company of Wesfarmers' size can enter to materially make a difference to its revenue.
Following examples like UK retailer Tesco and US-based Walmart and Costco, Australia's big retailers need new income streams to maintain their long-term growth. It is thought that Wesfarmers may be looking over AMP Limited (ASX: AMP) as a way to enter the financial services market more easily than creating a business from scratch.
Or could it be Suncorp Group Ltd (ASX: SUN) as well?
What does each of them have to offer potentially?
— Suncorp is an $18.6 billion insurer and Australia's fifth biggest bank. It is a well-established mortgage lender and the second-largest ASX-listed general insurer. It is currently streamlining its whole business and its banking arm has cleaned up its bad loan book. A leaner restructured business could be attractive to Wesfarmers.
The company has built up a lot of surplus capital to boost its financial strength. Part of this has gone towards special dividends in the last three years and Suncorp should have more funds from its cost-cutting simplification program.
— AMP Limited is a $17 billion wealth management company with over a 100-year business history. It does banking, which generates about 10% of total revenue. It also has been re-orientating its business to be more client centric and cost efficient. This has paid off recently with underlying net profit up 16% in the first half of FY 2014.
It has the largest financial advice network in Australia and is expanding in Asia where a growing middle class of customers will need more financial services.
It's too early for speculation and investors really shouldn't suddenly buy a company's stock over a whiff of merger and acquisition rumours. It may never happen. First and foremost, you should only buy stocks that you think are the best businesses to grow earnings. If something like a takeover offer occurs, that's icing on the cake, but you can't bank on it.
