MetLife - Uncertain Regulatory Environment And Low Yields Hold Shares Down

| About: MetLife, Inc. (MET)

Shares of Metlife (MET) lost over 3% of their value over the past trading week. The provider of insurance, annuities and employee benefits programs gave a little inspiring update for the coming year.

Soft Fourth Quarter Earnings Outlook

Metlife estimates that operating earnings for the full year of 2012 will come in between $5.5 and $5.6 billion. Earnings could come in between $5.15 and $5.25 per share, up 19% from last year's earnings of $4.38 per share.

Full year revenues from serving over 90 million customers will come in between $47.3 an $47.7 billion, up 5% from last year.

The guidance implies that fourth quarter earnings will come in between $1.2 an $1.3 billion, or $1.12-$1.22 per share. Last year, the company earned $1.17 per share in the final quarter of the year.

The guidance falls short to analysts estimates of $1.22 per share, as Metlife expects to take after-tax charges between $85 and $95 million as a result of super storm Sandy.

CEO and Chairman Steven A. Kandarian commented on the outlook, "In 2012, we expect operating earnings to increase 19% over 2011, which reflects both solid investment spreads as well as favorable insurance margins. During the year, we continued to benefit from our strong risk management focus and good expense management. We also made significant progress on our strategic objectives, expanding in emerging markets, reducing product risk, growing our employee benefit business and becoming more customer centric."

2013 Guidance

For the full year of 2013, Metlife expects operating earnings to come in between $5.5 and $5.9 billion, or between $4.95 and $5.35 per share.

Again, the forecast fell short of analysts expectations who expected Metlife to guide for earnings of $5.47 per share.

Kandarian commented on the next year outlook, "While our operating earnings per share are expected to be lower in 2013 than in 2012, they are broadly consistent with what we predicted a year ago for an extended low interest rate environment. In light of a lower-for-longer interest scenario, we have a heightened sense of urgency about our strategic initiatives."


The market currently values the firm at $31.84 per share, or at roughly $34.7 billion. This values the firm at 0.55 times the book value of $58.35 per share. Excluding accumulated other comprehensive income, shares are valued at 0.67 times the book value.

Based on the full year outlook for 2012, shares trade at 0.7 times 2012s annual revenues and merely 6 times annual earnings.

Metlife pays an annual dividend of $0.74 per share, for an annual dividend yield of 2.3%.

Some Historical Perspective

Year to date, shares of Metlife trade essentially unchanged, trading with gains of 2%. Shares quickly rose from $31 in January to highs of $40 in March. Shares fell back to levels in the high twenties during the summer, currently exchanging hands at $32 per share.

From their peak around $70 per share in 2007, shares have lost more than half of their value. Shares rebounded from lows of $12 during the crisis to quickly rebound to almost $50 in 2011. The prolongued low interest environment has been hurting shares.

Investment Thesis

It is not just the cautious guidance which is triggering a sell-off. Metlife is uncertain over the long tem share buyback plans, as a result of a changing regulatory environment in the coming years. Kandarian commented, "I don't have total confidence in the ability to buyback shares over the next few years." He furthermore adds that operating plans assume no buybacks in 2013.

The commitment to return capital remains. Metlife plans to buy back up to $8 billion in gross buybacks through 2016. This includes $3 billion to offset dilution from the acquisition of ALICO for a net buyback of $5 billion, or 14% of total shares outstanding.

Besides issuing a fourth quarter and a full year 2013 outlook, the company furthermore announced the sale of Metlife's Bank Deposit business to GE Capital (GE). Metlife will transfer $6.5 billion in bank deposits, thereby de-registering as a bank holding company.

Metlife is suffering from the low interest environment. However the company remains optimistic despite the low rates. Metlife aims to achieve 20% of earnings from emerging markets in 2016, up from 14% at the moment. The company continues to believe that interests rate risks remain manageable. Even if interest rates remain low, operating earnings per share should expand given the growth of the non-US operations, improved efficiency and future buybacks.

The company continues to target return on equity of at least 12% in 2016, compared to 11% at the moment. Lower interest rates impacted the yield on Metlife's portfolio by 9 basis points this year, partially offset by hedges. For 2013 the low reinvestment rate will impact yields even more. To offset a decline in asset values in case interest rates rise, Metlife bought protection against higher interest rates.

I remain on the sidelines despite the very cheap earnings multiples. The dividend yield is fair, but shares remain depressed as cash flow generation does not flow through to shareholders. Expected cash flows to investors are limited as a result of an uncertain regulatory environment. Shares will become more interesting when cash flow distributions become more imminent.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.