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Have you MetLife?

July 28, 2014 | About:

MetLife (MET) is a company that provides insurance, annuities, and employee benefits to countries all over the world. I grew up watching old peanuts cartoons, so their marketing initiatives do bring a bit of nostalgia for me. I currently don’t have a position in MET, but will most likely add it to my portfolio very soon. And here’s why:

First, the company is committed to increasing its free cash flow, which I love. Here is a quote from their Chairman, President and CEO Steven Kandarian “One of the tangible ways our strategy will demonstrate success is by generating an increasing amount of free cash flow.2 We currently anticipate that the ratio of free cash flow to operating earnings will improve from approximately 35% today to a range of 45% to 55% during 2015-2016, assuming a reasonable regulatory environment and a gradual rise in interest rates. One of the lessons from my career in private equity and fixed income is the importance of cash flow. In private equity, cash flow expectations drive the investment decision-making process, and success or failure often hinges on the accuracy of these forecasts. In fixed income, you learn quickly that companies service debt with cash flow, not GAAP earnings. For a life insurance company, free cash flow is meaningful not only because it determines what can be distributed to shareholders in the form of dividends and share repurchases, but also because it provides a reality check on the quality of operating earnings. Life insurance companies have complex financial statements that can lead to valuation discounts in the marketplace. We believe a higher ratio of free cash flow to operating earnings will improve our valuation over time.”

I apologize for having such a long quote, but FCF is the most important metric we can look at when valuing a company. The fact that the CEO’s focus is on increasing free cash flow makes me want to buy MET right now! But let’s look at some charts and metrics to see if MET will truly add value to an investor’s portfolio, and if they are practicing what they preach.

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MetLife’s dividend is currently at 2.15%, which isn’t bad at all. MET has also been paying and increasing its dividend since 2000, which is a great sign for investors. Consistent and increasing dividends is one of the ways an investor can build wealth. MET is also trading at only 3.9 times its free cash flow and .9 times its book value, which isn’t a major discount as far as book value but is a wonderful sign when looking at free cash flow. Although its cash from operations did drop from $16.1 billion to $17.1 billion, and overall cash did drop from $15.7 billion to $7.5 from 2012 to 2013, I think MET would be a very good long term business to invest in. Their free cash flow per share is $14.45, and when we input this value into Guru’s DCF model, we get a fair value of $213.15 with a margin of safety of 74%, without adding tangible book value.

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The drop in overall cash flow is a little alarming, but the company's free cash flow is hard to ignore. I would strongly suggest taking a second look at MET and seeing if it would be a good fit to your portfolio.

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Comments

pravchaw
Pravchaw premium member - 2 months ago

I don't think valuing a financial company on a P/FCF is valid. Free Cash flow is too erratic for these businesses. Tangible book value is a better metric. Also insurance companies need to be valued on their combined ratio i.e., claims+expenses / earned premiums.

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