Please ensure Javascript is enabled for purposes of website accessibility

3 Reasons MetLife Stock Could Rise

By Jay Jenkins - Mar 8, 2016 at 12:45PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Here's what could go right for MetLife in a potentially transformative 2016.


Image source: company website.

MetLife (MET 1.03%) stock is down over 13% year to date and 18% over the past year, far exceeding the 3.6% and 6.4% declines in the S&P 500 for the same respective periods.

What will it take for MetLife to turn it around this year? Here are three possibilities.

The most important factor for MetLife stock right now is its plan to drop the "SiFi" designation
Following the financial crisis, regulators created a designation for the largest and most critical financial institutions, the "systemically important financial institutions." Systemically important financial institutions, or SiFi's, are subject to increased regulatory scrutiny and higher capital requirements on the balance sheet. These requirements safeguard the financial system in the event of another crisis, but also cause expenses to rise and returns to fall at the company's with the designation.

Most systemically important financial institutions are, not surprisingly, banks. However, there are a few non-bank SiFi's, including MetLife.

Over the past year, these non-bank SiFi's have been working to shed their designation as systemically important. MetLife initially tried suing the government, but a year later that path hasn't yielded any results.

General Electric, another non-bank Sifi, took a different tact. Last spring, GE announced plans to wind down its once powerful financial subsidiary, GE Capital. By selling off GE Capital's assets, GE would be able to escape the SiFi designation and avoid the regulatory burden that comes with it.

That plan of attack has thus far been successful, prompting other non-bank SiFi's to follow suit, MetLife among them. MetLife announced plans to divest businesses that represent upwards of 20% of its operating earnings.

Of the systemically important insurance companies in the U.S., American International Group is the only one not currently pursuing a strategy to shed the "SiFi" designation, despite strong shareholder pressure to follow suit.

The markets have thus far been supportive of the strategy. GE announced the plan to dismantle GE Capital in April, and since that time the company's stock has risen 20.5%. That's considerably better than the S&P 500's 4.4% decline over the same period.

MetLife is making progress of its own in a similar way. Its stock jumped 8% on the announcement of the divestitures, and on Feb. 29, when the company announced the sale of its U.S. retail advisor group to MassMutual for just over $300 million, the market responded by sending its stock up over 5%.

If MetLife is able to continue shedding assets at appropriate valuations, steadily streamlining the business and unlocking value for shareholders, I expect it will eventually shed the SiFi designation. I think that could very likely send the stock much higher.

MET Chart

MET data by YCharts

Capital distributions. Lots of capital distributions.
Shedding the SiFi designation is not the only reason that MetLife stock could rise. One other reason could be the return of substantial capital distributions to shareholders.

Before MetLife announced its plans to shrink itself, the company was an avid purchaser of company shares. In the fourth quarter of last year, the company bought back $817 million of shares. It bought an additional $70 million in the 2016 first quarter before the announcement. On top of that, MetLife also has a current dividend yield of 3.74%.

However, because of the uncertainty related to the company's planned divestitures, share buy backs have been suspended.

As the year progresses, it's likely that MetLife will resume its dividend purchases in some form, depending on the final outcome from the asset sales. Buying shares back at such a high volume has the effect of boosting the stock price both due by decreasing the supply of shares outstanding and by increasing the demand for shares through the company's buying.

Another possible scenario is a special dividend, depending on the structure of asset sales. General Electric has said that it plans to issue a special dividend to distribute some of the capital it is collecting from its asset sales, serving as an example of a special dividend emerging from a comparable situation. It is speculation at this point in MetLife's case, but the outcome does not seem unreasonable. A special dividend could easily drive the stock higher this year.

The company's core business could recover from a tough 2015
MetLife's 2015 financial results were materially worse than the numbers reported for 2014. If that were to reverse, the stock could rise.

2015 operating earnings were down 16% from 2014. Adjusting for a large impairment charge to a U.K. based subsidiary's value in the third quarter of 2015, MetLife's operating earnings were still down 1% year over year. On a per-share basis, operating earnings were down 15%.

MET EPS Diluted (Quarterly) Chart

MET EPS Diluted (Quarterly) data by YCharts

However, it seems reasonable that 2016 could see a reversal of this fortune. For example, the largest driver of the tough 2015 performance was lower variable investment income, the account where MetLife reports returns from alternative asset classes. These returns are more volatile than other investments, but have provided strong income for the company over the long term.

The strong U.S. dollar also hurt earnings, reducing fourth quarter earnings per share by $0.05 compared with the 2014 fourth quarter.

The decline in variable investment income will rise and fall over time, making this year's performance less significant for long term investors. Likewise, changes in currency exchange rates will also fluctuate and do not reflect the business' true performance in its various subsidiaries and regions around the world. If either of these trends turn in favor of MetLife in 2016, the stock could rise.

Focus on what matters
There are plenty of other reasons MetLife stock could rise in 2016. However, the elephant in the room is the company's plan to divest assets, streamline operations, and shed the SiFi designation.

This will be the dominant storyline for MetLife for the foreseeable future, and nothing else will have the same level of influence on the company's stock, higher or lower.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

MetLife, Inc. Stock Quote
MetLife, Inc.
MET
$63.44 (1.03%) $0.65

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
311%
 
S&P 500 Returns
110%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/01/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.