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MetLife: A Strong Dividend and Modest Undervaluation

GuruFocus.com
·6 mins read

- By Robert Abbott

For investors who like dividends, MetLife Inc. (NYSE:MET) is a promising name. This insurance company currently offers a dividend near 5% and for value investors, it is a company with manageable debt:

MetLife: A Strong Dividend and Modest Undervaluation
MetLife: A Strong Dividend and Modest Undervaluation


MetLife has been around since 1868, but it only became a publicly-traded stock in 2000 when it demutualized. It described itself this way in its 10-K for 2019:


"MetLife is one of the world's leading financial services companies, providing insurance, annuities, employee benefits and asset management. We hold leading market positions in the United States, Japan, Latin America, Asia, Europe and the Middle East."



Its main products are individual life insurance policies and annuities, along with group benefits insurance. On Sept. 17 of this year, it announced it was beefing up its vision care insurance by acquiring Versant Health. The $1.65 billion, all-cash deal will make it one of the top three firms in the U.S. managed vision care industry.

MetLife President and CEO Michel Khalaf said, "This transaction furthers our goal of deploying capital to the highest-value opportunities." That makes it a fit with the company's growth strategy, which is comprised of three elements:

  • Focus, referring to increasing free cash flow by applying its capital and other resources to the highest-value opportunities.

  • Simplify, referring to operational efficiency and customer experiences.

  • Differentiate, meaning it tries to make the most of its competitive advantages of brand, scale and more.



So, this is a company that has a long history, a plan for future growth and the resources to implement the plan. But do the fundamentals justify the bullish tone?

Financial strength

MetLife: A Strong Dividend and Modest Undervaluation
MetLife: A Strong Dividend and Modest Undervaluation

The GuruFocus system gives it a middling rating of 5 out of 10 for financial strength. The company is generating a lot more cash than it is borrowing, something that's confirmed by an interest coverage ratio of more than 10.

The weighted average cost of capital (WACC) is significantly higher than the return on invested capital (ROIC). That's a bad sign because when a company pays more for its capital than it gets back, shareholder value is being destroyed, not created.

However, we find that low ROIC is a common characteristic of insurance companies, as shown in this chart:

MetLife: A Strong Dividend and Modest Undervaluation
MetLife: A Strong Dividend and Modest Undervaluation

Thus, this metric may not be useful for insurance companies. A more helpful metric could be return on equity in this regard.

Profitability

MetLife: A Strong Dividend and Modest Undervaluation
MetLife: A Strong Dividend and Modest Undervaluation

MetLife receives a rating of 6 out of 10 for its profitability Why so low with that much green? Let's check the criteria for the profitability rating:

  • Operating Margin: This is not reported for financials and therefore has to be disregarded.

  • Piotroski F-Score: As we saw in the financial strength table, this is quite strong at 8 out of 9.

  • Trend of the Operating Margin: Again, the operating margin is not reported.

  • Consistency of the profitability: A chart of net income shows a sawtooth pattern, which means serious inconsistency.

  • Predictability Rank: Just 1 out of 5, which is low and reflects the inconsistency of net income.



Summing up, the profitability ranking is pulled down by the company's inconsistent income generation.

Turning to the specifics on the table, the net margin and ROE are both strong at the moment. However, return on equity has been volatile, fluctuating between 11.6% in 2012 and 1.1% in 2016:

MetLife: A Strong Dividend and Modest Undervaluation
MetLife: A Strong Dividend and Modest Undervaluation

All three results on the three-year growth lines are satisfactory, and since the Ebitda and earnings per share growth rates are higher than the revenue growth rate, we can assume the company is becoming more efficient.

Valuation

MetLife: A Strong Dividend and Modest Undervaluation
MetLife: A Strong Dividend and Modest Undervaluation

Based on the price-earnings ratio, investors might expect the stock to be significantly undervalued, rather than modestly undervalued. These are the salient numbers:

  • Price-earnings ratio: 4.86

  • Industry median price-earnings ratio: 11.78

  • MetLife's 10-year historical median price-earnings ratio: 9.95.



The company's current price-earnings ratio is almost half of its median. However, the GuruFocus Value chart takes more than just price into consideration.

The PEG ratio is high at 9.4, a function mainly of a low Ebitda growth rate over the past five years (not the three years shown in the table). The average Ebitda growth rate over five years is just 0.50%.

MetLife's business predictability rating is just 1 out of 5 stars, so any discounted cash flow (DCF) measurements will be unreliable.

Dividend and share buybacks

MetLife: A Strong Dividend and Modest Undervaluation
MetLife: A Strong Dividend and Modest Undervaluation

As noted at the beginning of the article, MetLife offers a strong dividend. It has grown consistently since the company recovered from the Great Recession:

MetLife: A Strong Dividend and Modest Undervaluation
MetLife: A Strong Dividend and Modest Undervaluation

Over the past three years, the dividend growth rate averaged 3.4%. The dividend payout ratio is low at 23%, leaving room for future growth. The forward dividend yield is slightly higher than the trailing 12-months (TTM) yield because the company increased the dividend from $0.44 to $0.46 in May.

Combining the dividend growth rate and the current yield produces a five-year yield-on-cost of 6.36%, which is very good for an S&P 500 company.

The company also has a good record of rewarding shareholders through share repurchases; its three-year average share buyback ratio is 5.8.

Those who held the stock for the past 10 years have seen few capital gains. Technical analysts would say the stock has been mostly rangebound:

MetLife: A Strong Dividend and Modest Undervaluation
MetLife: A Strong Dividend and Modest Undervaluation

Gurus

The gurus have shown a strong interest in MetLife this year:

MetLife: A Strong Dividend and Modest Undervaluation
MetLife: A Strong Dividend and Modest Undervaluation

At the end of the second quarter, 10 investing giants had positions in the insurer. Dodge & Cox led the pack with 66,337,971 shares, good for a 7.31% stake in MetLife and representing 2.23% of the investment firm's capital. It added 12.32% to its holding during the quarter.

Diamond Hill Capital (Trades, Portfolio) was the second-largest owner among the gurus; however, it cut its position by 22% to finish the quarter with 7,786,737 shares.

The T Rowe Price Equity Income Fund (Trades, Portfolio) added 2.42% to its holding in the quarter, winding up with 7,190,000 shares.

Conclusion

The fundamentals generally support a bullish thesis about MetLife's longer-term fortunes. Arguably, the share price is modestly undervalued, making it more affordable than it has been. While the GF Value calculation gives a modestly undervalued rating, the price-earnings ratio suggests a deeper undervaluation.

With fairly solid fundamentals, this stock could be of interest to income investors who are willing to take some risk. With the reduced price and low level of indebtedness, MetLife may be of interest to value investors. Finally, growth investors will find nothing tempting here, at least based on what we have seen over the past decade.

Disclosure: I do not own shares in any of the companies named in this article.

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This article first appeared on GuruFocus.