MetLife stock is up 20% this year and could gain even more

MetLife stock has actually had an eventful 2022-2023. While the S&P 500 index has fallen 22% 2022 year, MetLife stock has cruised to a 20% gain, including reinvested dividends.

The company’s diversified businesses, which it has simplified over the years, have enabled it to post better-than-expected earnings every quarter this year, while forecasts for 2023 have risen, as well. MetLife repeated the trick during the third quarter — it reported an adjusted profit of $1.21 a share this past Wednesday, beating estimates of $1.18, writes Dow Jones Newswires.

There likely are more gains where those came from. MetLife stock has been range-bound since the beginning of 2007, but now looks ready to rally even more.

Between rising interest rates that help boost MetLife’s investment returns and a job market that might hold up better than some expect, its shares look attractive for investors seeking steady, solid returns.

MetLife isn’t the company it once was. Beginning with the spinoff of Brighthouse Financial (BHF) in 2017, it has spent the past five years shedding its low-margin, slow-growth businesses in favor of those with better returns and higher margins.

Brighthouse, which focuses on annuities and traditional life insurance, was the first unit to go, followed by others that were either too small or too niche to generate efficient returns, including its businesses in Poland and Greece, as well as its Metropolitan Property and Casualty Insurance unit, which it sold to Farmers Group for $3.9 billion in early 2021.

What’s left is far more profitable and efficient.

MetLife now focuses on employee benefit programs, as well as more traditional life, dental, and disability insurance, while reinvesting the proceeds in bonds, stocks, hedge funds, and private equity.

The resulting company’s operating margin is expected to rise to more than 10% in 2023 from 8.5% in 2016 — while its return on equity went from 1.2% in 2016 to 9.2% in 2021. They don’t have that low-margin business [Brighthouse] around their neck that would drag down their return

Argus Research analyst Kevin Heal

MetLife is also generating a truckload of cash. The company has a history of stable sales and earnings. Since 2018, it has averaged annual sales of just under $69 billion, with a dip a little below $68 billion in 2020. Analysts expect $70.7 billion in 2023.

Its premium business, which includes all insurance services for medical visits, accidents, and financial assets, is expected to generate $47.6 billion in sales in 2022, up from $42 billion in 2021.

Operating cash flow is likely to be $7.3 billion in 2022, down from a pandemic-driven $10.1 billion in 2021, before rising to $8.2 billion in 2023 and $8.7 billion by 2024.

MetLife plans to return a chunk of that cash to shareholders. It has bought back $3.9 billion in stock over the past 12 months and has paid $1.8 billion in dividends – a yield of 2.8%. Those payouts should continue.

On an annualized basis, the company was on track to return about $5.4 billion in dividends and share repurchases, as of the third quarter, or more than 9% of its market capitalization. That’s close to the return on a high-yield bond, without as much risk, and far superior to the just-under 4.1% on the safe 10-year Treasury note.

We think we can continue to see some pretty good returns. These dividends are very safe, and they’ve earmarked plenty of money for buybacks.

Mark Stoeckle, senior portfolio manager of the Adams Diversified Equity fund (ADX)

The big risk is that the Federal Reserve will keep lifting interest rates to cool the economy, triggering a recession that causes companies to start laying off employees. That scenario would hurt MetLife’s Group Benefits unit, which provides disability and other forms of insurance to employees. That’s what happened during the Covid pandemic, when the unit’s sales fell 18% during the first quarter of 2020. But some economists think that employment might hold up better during the next slowdown, owing to widespread worker shortages.

But the real difference maker could be MetLife’s investment business.

Its hedge funds and private-equity holdings are expected to have dropped in 2022 along with stock prices.

Management said after the company’s third-quarter earnings release this past week that a 36% decline in total net investment income, to $3.6 billion for the third quarter, was attributable to lower private-equity returns.

Still, interest rates have climbed recently, which means MetLife will get higher yields on the bonds it buys and holds until maturity. Analysts expect $18.5 billion in net investment revenue for 2023, including that from the fixed-income business.

For MetLife, we see potentially better-than-expected alternative investment returns, based on results from other insurers so far this quarter, and also believe we could see upward investment revisions on improved investment yields from higher interest rates

UBS analyst Brian Meredith

Despite MetLife’s rally this year, the stock trades at only 9.2 times expected 12-month forward earnings, just a touch higher than its 20-year average of 8.9 times and well below the S&P 500’s 16 times.

RBC analyst Mark Dwelle has a $77 price target on MetLife stock, 5% above Thursday’s close of $73.11. But if interest rates remain high, the stock market begins to recover, and employment doesn’t drop too much, the shares could rise to $88, a 20% gain.

by Nataly Kramer