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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week


October 26th 2012 MetLife
NYSE Symbol: MET
Industry: Insurance
Price as of 10/19: $35.22

Earnings season is once again upon us. After a plethora of preannouncements from material and industrial names, we're seeing cracks in other sectors due in part to sales not matching up to expectations. The technology sector is taking the brunt of the sell off with IBM down 7% last week, Apple down 11%, Google down 12%, and Intel down 22% in the last couple of months. Just this week other blue chips in other sectors came under selling pressure following earnings like McDonalds, Chipotle Mexican Grill, Stanley Black & Decker, CSX, Parker Hannifin, and GE. The sector holding up the best so far this year is the financials thanks to strong housing data. The homebuilders have been on fire this year acting more like Internet stocks from the go go days of the 1990s. Within the financial sector, the insurance companies while improving continue to lag. Travelers jumped 4% last week thanks to better than expected earnings. This week we'll highlight an insurance company with a one-time dividend coming up in a couple weeks. The stock of the week is MetLife. Since featuring the stock a year ago, the stock is only modestly higher and remains undervalued. The company has fought to get from under the stringent banking regulations that prevent it from hiking their dividend and buying back more stock. Eventually they will succeed which should be good news for their stock and the dividend. In the meantime, investors get a stock trading for 0.5 times sales, 0.61 trades book value, and 6 times earnings with a 2% one-time dividend coming in two weeks. Insurance stocks are not conservative, but MetLife is doing all the right things to improve their fundamentals which should also boost their stock price.

MetLife won't report earnings until next week, but last quarter the largest US life insurer reported a second-quarter profit that more than doubled due to derivatives gains and growth in its international businesses including Japan. Net income rose to $2.26 billion, or $2.12 a share, from $1.07 billion, or $1, a year earlier. Chief Executive Officer Steven Kandarian is counting on global expansion as he looks to cut costs and limit sales of capital-intensive products in the U.S. Operating profit climbed in the firm's three geographic regions, led by a 61 percent jump in Asia thanks to life-insurance sales in Japan. However the biggest hamper to MetLife and its' stock is the banking regulations. To deal with this, MetLife has agreed to sell their $7 billion in banking deposits to GE hopefully by year end. Once this deal has been completed, MetLife is optimistic they will be able to move from under the banking restrictions allowing the insurer to hike their dividend and initiate a share buyback.

The catalyst for MetLife's stock will come from the freedom of banking regulations to hike their dividend and initiate a share buyback. Remember, MetLife is getting $7 billion in cash for the sale of their banking business. Also , MetLife only pays out 12% of their cash flow in the form of a dividend. Most income stocks pay out 50% of their cash in the form of a dividend. Even if MetLife hikes their dividend to 25% of their cash flow, that translates into a double thereby boosting the yield over 4%. That should do wonders for the stock price. In the meantime, investors get a stock trading for 6 times earnings, 5.5 times next years' earnings, 0.5 times sales, and 0.6 times book value of $58 a share and sports a dividend yield of 2.3% which is better than a 10 year Treasury. Conservative investors may want to wait for earnings next week before buying, but with a stock trading at a fraction of its' historic valuation, MetLife looks like a great stock for long term investors.