MetLife: A Capital Return Story That Has Legs
Summary
- The company reported impressive Q3 2017 results that beat the top- and bottom-line estimates.
- One of the main reasons to be bullish on MET is the company's capital return story that keeps getting better.
- MET shares are a long-term buy at today's price.
MetLife (NYSE:MET) is an insurance company that has a bullish setup but investors have only recently started to realize that this insurance company has a legitimate long-term story to tell. MET shares have outperformed the broader market over the last year (up 31% vs S&P 500 being up only 24%) and shares are up an impressive 16% over just the last six months.
(Source: Nasdaq)
Too far, too fast? I do not think so. In early 2016, I wrote an article on MetLife and stated that one of the main reasons to remain bullish about this insurer was the company's capital return story. I believe that MetLife's story has improved since that point in time so, in my opinion, long-term investors should continue to accumulate shares, even at today's price.
A Capital Return Story that Has Legs
On November 1, 2017, MetLife reported Q3 2017 results that beat the top- and bottom-line estimates. For the quarter, MetLife reported adjusted EPS of $1.09 (vs $0.90 estimate) on revenues of $16.1B (vs $15.9B estimate). There was a lot to like about the company's Q3 2017 results but it is important to remember that there was also a lot of noise in the numbers.
(Source: Q3 2017 Earnings Presentation)
The BrightHouse Financial (BHF) spin resulted in MetLife spending approximately $1.1B in separation-related expenses so it had a material impact on the quarterly numbers. Additionally, as shown above, MetLife's book value per share was 'negatively' impacted by the spin. On the other hand, a positive development for the quarter was an actuarial assumption review that increased operating earnings by ~$153MM. These non-recurring events skewed the quarterly results.
The company, however, reported strong underwriting results and the international businesses, most notably Latin America, were again key growth drivers.
MetLife's Q3 2017 operating results show that this company is well-positioned for 2018 and beyond, but one of the biggest takeaways from the earnings release and commentary, of course, in my opinion, was the company's strong commitment to returning capital to shareholders. The board approved a new $2B buyback program and announced plans to exchange the remaining stake in BrightHouse Financial for MET shares in 2018 --it should be noted that the BHF disposal will be in addition to the $2B buyback program, as described by management during the Q3 2017 conference call. The company previously announced a $3B buyback program just last year and management has already used $2.8B to repurchase shares (about a half $1B in the latest quarter). I believe that Mr Steven A. Kandarian, CEO, said it best:
"Excess capital belongs to our shareholders, and we are pleased to announce a new $2 billion share repurchase authorization. Under the Brighthouse Financial exchange offer for MetLife common stock, shares potentially exchanged would be additive to this $2 billion repurchase program. Together with our common stock dividend, we are on track to return $4.5 billion of capital to our shareholders in 2017.”
A billion here and a billion there may not seem like much, but let's take a few minutes to consider how impactful the buyback program has been over just the last year.
| (in millions) | 9/30/17 | 6/30/17 | 3/31/17 | 12/30/16 | 9/30/16 |
| Share Count (diluted) | 1071.5 | 1082.1 | 1098.7 | 1108.8 | 1109.3 |
| Chg | -1% | -2% | -1% | 0% |
(Source: Data from Q3 2017 Financial Suppl; table created by W.G. Investment Research)
MetLife's share count is down almost 3.5% over just the last twelve months. So, looking forward, the new $2B buyback program, in addition to the BrightHouse disposal, will likely create a tremendous amount of shareholder value through 2018.
Valuation
MET shares are trading at a reasonable valuation when compared to the company's peer group based on book value metrics.
Additionally, MET shares are attractively valued based on forward earnings estimates.
Lastly, MetLife pays an above-average dividend and has the necessary wiggle room to increase its dividend in the years ahead.
| Dividend | 2017E Earnings | 2018E Earnings | |
| AIG | $1.28 | $5.27 | $5.38 |
| Projected Payout | 24% | 24% | |
| MET | $1.60 | $4.78 | $4.77 |
| Projected Payout | 33% | 34% | |
| PRU | $3.00 | $10.13 | $11.18 |
| Projected Payout | 30% | 27% | |
| TRV | $2.88 | $7.64 | $9.65 |
| Projected Payout | 38% | 30% | |
| Avg. Projected Payout | 31% | 29% |
(Source: Data per Yahoo! Finance; table created by W.G. Investment Research)
The takeaways: (1) MET shares are attractively valued, (2) the company pays an above-average dividend, and (3) the company has the room to increase the dividend. What's not to like?
Bottom Line
MetLife's capital return story has been one of the main reasons to remain bullish (of course, the improving operating results were important too), and I believe that the future looks even brighter. The company is well-capitalized and the management team (and board) appears committed to rightsizing its business. Moreover, MetLife is in a legal battle with the government over the Systemically Important Financial Institution, or SIFI, designation so MET investors should be encouraged by the recent news that American International Group's (AIG) designation was rescinded. As such, MetLife's management team may soon have the opportunity to focus solely on their business instead of trying to contend with the overly burdensome rules and regulations.
The Brighthouse spinoff has created some noise in MetLife's numbers but this impact is short-term in nature. Therefore, investors with a time horizon longer than the next year or two should treat any pullbacks in MET shares as long-term buying opportunities.
Author's Note: MetLife is a core holding in the R.I.P. portfolio and I have no plans to reduce the position in the near future.
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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.
This article was written by
Analyst’s Disclosure: I am/we are long MET, BHF, 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.
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Comments (9)
Don't get me wrong I am very happy with my return on MET but clearly PRU has been better in the last year and will probably be better in 2018.
One last comment every 0.25% increase in the FED funds rate adds roughly $250 million to the bottom line of PRU and about $180 million to the bottom line of MET.
