On February, 3, 2016, MetLife (NYSE:MET) reported Q4 and Full-Year 2015 results that greatly contributed to shares being down over 5% on the next trading day (full disclosure: the broader market sell-off was also in play). The company reported adjusted EPS of $1.23 for Q4 2015, which missed the consensus EPS estimate of $1.36 by ~10%. In addition, MetLife missed top-line estimates by reporting Q4 2015 revenue of $17.11b versus the consensus estimate of $17.45b.
For comparison purposes, MetLife reported Q4 2014 adjusted EPS of $1.38 on revenue of $18.24b. Similar to the other large insurers, the 2015 results were negatively impacted by several significant headwinds. Therefore, the YoY declines in both the top- and bottom-lines are worrisome if you do not take the challenging operating environment into consideration (more on this below).
On a YTD basis, MET shares are down over 25%, while the S&P 500 is down only 9% and shares of American International Group (AIG) are down only 16%.
So, investors must now ask themselves where MetLife's stock price goes from here. Personally, I believe that the share price will go higher in the quarters ahead and I will explain why below. I recently added a small MetLife position in my R.I.P. portfolio due to the fact that the company has several catalysts in place to create shareholder value over the next few years. Furthermore, MET shares are attractively valued based on both earnings and adjusted book value.
Fiscal 2015 Operating Results
Let's start with reviewing some of the full-year 2015 results.
(Source: Q4 and Full-Year 2015 Earnings Results --linked above)
As shown, the results were down across the board but let me add some color to this. First, the total operating revenues were down 2% YoY and two major contributors were the lower universal life and investment-type fees and net investment income. For 2015, the universal life and investment-type fees were down ~4% YoY and net investment income was down ~3% YoY. In the conference call, management highlighted the fact that investment income was negatively impacted by poor hedge fund performance and weak private equity returns.
For full-year 2015, both net income and net income/share were down, as earnings were impacted by several factors --strong U.S. dollar ($0.05/share hit to earnings), non-cash charge in second half of 2015 ($792m tax related charge), and poor investment returns.
There is no denying the fact that MetLife reported poor operating results, but the unimpressive results were inline with what other insurers are currently experiencing (see here and here for examples). In my opinion, the challenging operating environment, coupled with the uncertainty related to the separation, is creating an opportunity for long-term investors to initial (or add to) a position in Metlife at an attractive valuation.
Returning Capital To Shareholders
MetLife has been committed to returning capital to shareholders, and Q4 2015 was no exception. MetLife repurchased $822m of shares in the last quarter of 2015, and repurchased an additional $70m in January 2016.
Based on today's share price, MetLife's current dividend yield is an impressive 4.2% and the company is sporting a payout ratio in the lower 30's based on trailing earnings. As such, investors will still be handsomely paid to wait out the storm (i.e. tough operating environment and finalization the separation).
On the other hand, management announced during the conference call that the company would not be repurchasing any more shares until the details of the separation plan are disclosed. I am a proponent of the plan to separate a substantial portion of the U.S. Retail Business, but not buying back shares at the current valuation is a missed opportunity to create significant shareholder value in short order.
From a valuation standpoint, MET shares are currently attractively valued based on earnings and the company's adjusted book value. Based on estimates from Yahoo! Finance, MetLife is trading at ~6x estimated 2016 earnings. This type of valuation will allow for MetLife to lower the earnings bar and still be attractively valued.
For the book value analysis, let's first look at how the book value and adjusted book value figures have been trending over the last year.
|Book value/share, excluding AOCI other than FCTA||$51.15||$51.11||$50.73||$50.45||$49.53|
|Book value/share - tangible common stockholders' equity||$42.22||$42.21||$41.73||$41.32||$40.36|
(Source: Data from Q4'15, Q3'15, Q2'15, and Q1'15 earnings presentations. The table was created by W.G. Investment Research)
The company has struggled to grow its book value and adjusted book value figures over the last year, and this is another reason for the downward pressure for the share price. However, Metlife is trading at 0.84x book value/share - tangible common stockholders' equity, and at a more attractive 0.59x book value.
The last catalyst that I will mention is the lawsuit that MetLife filed in order to rid itself of the Systemically Important Financial Institution, or SIFI, designation. The MetLife share price will greatly appreciate in value if the company were to receive a favorable ruling.
Metlife, along with the other large insurance companies, is operating in an environment that is negatively impacting both revenues and earnings. The strong dollar is pressuring the international operating results, and it appears that the low interest rate environment will be with us for awhile. Lastly, MetLife's earnings will likely be volatile over the next few quarters as the company will have restructuring charges related to the planned separation. These are all headwinds that management will have to contend with and that will impact earnings for at least the first half of 2016. These headwinds, along with the broader market sell-off, will create buying opportunities for investors looking to add a large insurer at an attractive valuation. Moreover, investors with a long-term perspective will be richly rewarded for layering into a position in MetLife throughout 2016.
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Disclaimer: This article is not a recommendation to buy or sell any stock mentioned. These are only my personal opinions. Every investor must do his/her own due diligence before making any investment decision.
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Disclosure: I am/we are long MET, AIG. 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.