The AMP Limited (ASX: AMP) share price has been absolutely smashed this week, hitting an all-time low of $1.74 on Monday and now trading at $1.80 this morning.
With the shares being priced for a bargain, many investors are no doubt wondering if now is the perfect time to pick up some AMP shares – after all, Warren Buffett likes to say that the best time to buy is when there is blood on the streets, and the streets of AMP are awash.
What's happened to AMP?
The AMP share price fell close to 20% in a single day on Monday as AMP was forced to publicly reveal that its plans to sell its life insurance division AMP Life had been blocked by the Reserve Bank of New Zealand. This was a major blow to AMP and its new CEO Francesco De Ferrari, as the sale of AMP Life was the central piece in its turnaround plan. The funds (estimated at about $3 billion) that the sale would have raised would have provided a shot in the arm for the company and provided enough capital to maintain the company's dividend, while also funding the company's restructure.
As a consequence of this decision, the company has now announced that it will not be paying an interim dividend late this year and that its long-term plans would have to go back to the drawing board. Many are now predicting that AMP will have to raise capital another way, most likely by issuing new shares and other money instruments such as bonds.
Is AMP a value trap?
AMP has already proved itself a classic 'dividend trap' – investors who bought AMP shares last week for the 'supposed' 7.82% dividend have now been burned. Badly. This is what's known as a classic dividend trap, where investors rush to take advantage of a low share price to lock in a high yield, only to find the yield vanishing before their eyes.
So is AMP a value trap as well? There are definitely signs that things could get worse. If AMP are forced to issue new shares at theses record-low prices, it will be pretty disastrous for existing shareholders, as earnings per share will be irrevocably compromised for the foreseeable future – everyone loses.
Foolish takeaway
Although there will be contrarians yelling out there that you must 'go against the herd' and 'be brave', I simply think there is still too much risk in AMP and the market is selling off the shares for good reason. AMP remains a high-risk play, and I will certainly be watching from the sidelines for a while yet.
