MetLife: Expected Net Investment Growth For Upcoming Earnings (NYSE:MET)

Overview

I previously rated MetLife, Inc. (NYSE:MET) a hold in my last article published at the end of October. Since then, the price has moved up more than 20% to my surprise. With earnings on the horizon, I stay weary of starting a position here after the price runs up. To have a more confident stance on entry, I would like to see if the upcoming earnings report on Feb. 5 meets my expectations. So let’s dig in and determine whether or not MET deserves a spot in your portfolio!

MetLife operates as a comprehensive financial services company, providing a range of products and services to both corporate and individual clients. The company is diversified across various business segments, including insurance, annuities, asset management, and employee benefits, contributing to its extensive financial services portfolio. Currently, MetLife holds a market capitalization of $44 billion, with its stock experiencing an 18% year-to-date decrease. Despite the potential for a solid upside, caution is warranted due to lackluster projected revenue growth.

Earnings Outlook

The upcoming earnings will complete MET’s fiscal year 2023. The EPS estimate for this fiscal year is 7.35x. The earnings report would require an EPS of 1.95x to meet the expectation of 7.35x for the year. I expect the upcoming report to meet or surpass expectations based on the increased profitability from higher interest rates. We saw this play out over the previous set of earnings where the net investment income slightly rose from higher interest rates and higher variable investment income. We may see the price react to the upside in the short term.

Revenues are expected to reach $71.2B, and I think this is very likely to happen given the strong history of performance during Q4 reporting. MET has beat earnings expectations during Q4 reporting four out of the five last reports. Due to rising rates, I anticipate variable investment income to have grown as well as adjusted net income. As a plus, MET is stacked with cash and can manage interest rate fluctuations. The cash from operations has grown to over $13B while the free cash flow has crossed $11B.

However, my outlook for FY24 is a bit cautious as we are likely to experience several rate cuts from the Fed. Rate cuts are impactful because of the potential for a compression of net interest margins. As interest rates decline, the returns on investments made with policyholders’ premiums may decrease, impacting profitability. MetLife’s annuity business could face challenges in terms of pricing and overall profitability as well. Annuities often provide returns linked to interest rates, and sustained low rates may diminish the attractiveness of these products for both the company and its customers.

On the flip side of that, lower interest rates also can serve as a stimulus for economic activity. It could be the factor that encourages individuals and businesses to purchase insurance and investment products. This increased demand can boost MetLife’s revenue streams. I think we’re too early into the FY to tell how it will affect the stock but it’s things to be aware of.

Dividend

As of the latest declared quarterly dividend of $0.52/share, the current dividend yield is about 3%. The dividend here is ultra-safe when you consider the payout ratio is only 30%. MET’s payout ratio is healthier than the sector’s average of 36%. In addition to the healthy payout ratio, the dividend growth has been alright. Although the growth underperforms peers in the same industry, MET has still managed to grow the dividend over the last five-year period by a CAGR of 4.41%. Zooming out over a larger 10-year time horizon, the dividend growth looks stronger with a CAGR of 8.63%.

According to Portfolio Visualizer, a $10,000 investment would have seen your dividend income grow substantially over the last two decades. This is without adding any additional capital and only reinvesting dividends. If you were to hold, your income would’ve gone from under $100 up to $1,100. This would result in a YOC (yield on cost) nearing 10%. I bring this up because it’s completely possible.

Valuation

Since the stock price has seen a recent run-up, we can re-run a DCF (discounted cash flow) calculation to determine a fair stock value. The current P/E sits around 9.5x which is higher than MET’s five-year average P/E of 8.26x. This might signal that the price is trading at a slight premium but to be sure, let’s look at the expected EPS reporting for their fiscal year of 2023 and 2024. This upcoming earning report will complete their FY23. the outlook is as follows:

• 2023: EPS estimate of 7.35.
• 2024: EPS estimate of 9.15.

The estimated revenue growth between the two fiscal years is about 3.2%. However, over the last five-year period, the average revenue growth was only 1.4% so we will use this as a metric instead. Using these as inputs in our calculation, we can determine that a fair value estimate for MET is about $70.31/share.

This estimated fair price almost perfectly aligns with the current price of MET, meaning that the stock currently trades at fair value. Therefore, I remain on the sidelines until the price comes down a bit. Changing the EPS input on our calculator to 2024’s estimate (9.15) changes the fair stock value to $87.5/share, but I do not think this is likely. This assumption is based on the lackluster history of performance so far, and I do not think future rate cuts are enough of a catalyst to propel earnings to this level.

Takeaway

MetLife’s upcoming earnings report for fiscal year 2023 takes center stage. The earnings outlook is optimistic, with an expected EPS of 7.35 and the potential for positive reactions in the short term. This is reinforced by the likeliness of increased profitability from higher interest rates. However, a note of caution arises for fiscal year 2024, as potential rate cuts from the Federal Reserve could impact MetLife’s financial landscape. The associated challenges, including net interest margin compression and potential impacts on the annuity business, are significant considerations.

On the positive side, lower interest rates could stimulate economic activity, potentially boosting MET’s revenue streams. The dividend, currently at 3%, stands out as ultra-safe with a healthy payout ratio of 30% and consistent growth. Valuation analysis suggests that the stock currently trades at fair value, so I will not be starting a position here. Rather, I will be on the sidelines to see how the next few quarters play out.