MetLife: Tough Environment But Good Results

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About: MetLife, Inc. (MET)
by: WG Investment Research
Summary

MetLife recently reported strong Q4 and Full-year 2018 operating results, but the stock has been under pressure since the earnings report was released.

This insurer is well-positioned for 2019 and beyond, but shareholders may be in for a bumpy ride over the next few quarters.

I am long MetLife, and I plan to stay long the stock.

MetLife (NYSE:MET) recently reported Q4 and Full-year 2018 results that were not well-received by the market, as shown by the fact that the stock is down by over 5% since the results were released.

Chart Data by YCharts

While MetLife's operating results definitely left investors wanting more, I believe that the insurer started 2019 with a good earnings report. Moreover, MetLife appears to be well-positioned for 2019 so, in my opinion, investors with a long-term mindset should consider adding MET shares on pullbacks.

The Latest, Tough Environment But Good Results

On February 6, 2019, MetLife reported Q4 2018 results that missed on the top-line but that beat the consensus earnings estimate. The insurer reported adjusted Q4 2018 EPS of $1.35 (beat by $0.07) on revenue of $15.6B (missed by $220M). On an annual basis, MetLife's most recent results were strong across the board when compared to the prior fiscal year.

Source: Q4 and Full-year 2018 Earnings Press Release

The U.S. tax reform bill was a major factor for the YoY earnings growth, but MetLife's management team also had the company well-positioned for 2018, as shown by the highlights:

  • Total revenue grew by 9% YoY with Premiums, fees, & other revenues higher by 12%
  • Reported net income of $5B (up from $3.9B in 2017), which translated into net income per share growth of 36% YoY (to $4.91 per share)
  • Adjusted book value grew by 4% YoY (from $42.92 to $44.62)
  • Returned a record $5.7B to shareholders through buybacks and dividends in 2018

2018 turned out to be a challenging period of time for the broader market, but the stocks of the large global insurance companies were hit worst.

Chart Data by YCharts

The poor stock performance, however, does not tell the whole story as MetLife was able to deliver strong operating results for the final three months of the prior year, with its U.S. business leading the charge.

Source: Q4 and Full-year 2018 Earnings Call Slides

In 2018, MetLife had to contend with falling interest rates, weak equity markets, and global economic concerns, which resulted in a tough operating environment for this large insurer. However, as described by management during the conference call, their goal is for this company to be in a position to perform well in any environment. EMEA was a problem area in 2018, and the company will likely also have to contend with headwinds over the next 12 months, but, as shown above, the U.S. and Latin American operations have promising business prospects.

And looking ahead, the real story for 2019 for this insurer will be the ability of management to reduce MetLife's expense base, which is actually a large component of the company's long-term earnings growth strategy. So far, so good.

Source: Q4 and Full-year 2018 Earnings Call Slides

This type of expense reduction will results in billions of dollars in savings over the next few years (remember, management plans to reduce expenses by $800M by 2020), and this is why, as I previously described, I believe that MetLife is in a great position for 2019 and beyond.

MetLife Is (And Has Been) A Capital Return Story

In 2018, management bought back $4B of MetLife's stock and paid $1.7B in dividends to shareholders, which is a record number for this insurer (returned $5.7B of capital to shareholders). Management repurchased $1.2B worth of shares in Q4 2018 alone!

Let's also not forget that the company's current dividend yield is pushing 4%, and, more importantly, management has the wiggle room to increase the dividend for years to come (i.e., the payout ratio is well below 40%).

Source: Fidelity

Lastly, MetLife still has $1.3B outstanding in its repurchase program (the same $2B program that was just authorized in November 2018), so I believe that investors should expect more of the same in 2019/2020 when it comes to this company's capital return story.

Valuation

MetLife's stock is attractively valued based on several different metrics when compared to its peers.

Chart Data by YCharts
Chart Data by YCharts

2019 may not seem like an ideal environment for the insurers, but, in my opinion, the risks are largely baked into MetLife's stock price.

Risks

The biggest risk for any insurer, including MetLife, is the sufficiency of the company's reserves. The company will likely have immaterial one-off reserve charges on a somewhat consistent basis, but any material adjustment could negatively impact MetLife's stock price.

Any additional internal control issues will likely have a material impact on sentiment for this large insurer (remember, MetLife previously disclosed a material weakness in its internal controls). So, if any more shoes drop as it pertains to internal controls, I may jump ship and not look back.

Additionally, the LTC business could turn out to be a significant headwind, in my opinion, so investors should pay close attention to these reserves through at least 2020.

Bottom Line

2018 was not a great year for MetLife's stock, but, in my opinion, the insurer's full-year operating results show that the management team has this company well-positioned for 2019 and beyond. Equity market volatility, interest rate pressure, and global economic concerns (including trade) seem to the new normal in this environment, so investors should not expect for MetLife's stock to shoot straight up. However, I believe that the new[ish] MetLife - i.e., ex Brighthouse Financial (BHF) - should soon be able to perform in most operating environments.

As such, investors with a time horizon longer than 1-to-2 years should consider adding MET shares on pullbacks.

Author's Note: I have a MetLife position in the R.I.P. Portfolio, and I have no plans to sell shares in the near future.

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.

Disclosure: I am/we are long MET, BHF. 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.