For the first time since 2008, the board of global multi-line insurer, MetLife Inc. ( MET ) announced its intention to buy back shares worth $1.0 billion. The repurchase is expected to be complete by this year-end.
Previously, in Jan 2008, MetLife had sanctioned a $1.0 billion share repurchase program, of which $261 million were yet to be bought. This was followed by another approval of $1.0 billion in Apr 2008. Including these authorizations, MetLife currently has about $1.26 billion worth of shares available for buybacks at Mar 2014-end.
Regulatory Actions Still Afar
Despite the complete closure of its banking operations, MetLife faces ample regulatory challenges, including the risk of being acknowledged as a systemically important financial institution (SIFI).
Such hindrances are liable to put the company under the Federal Reserve's supervision and stressful capital compliance scenarios, thereby posing difficulties in the completion of the previously targeted share repurchases worth about $8 billion by 2016. Notably, in 2013, MetLife had shelved its share repurchases. While managements awaits more clarity with respect to regulations, the final outcome is not expected before 2015.
Sturdy Capital Supports Deployment
On the other hand, MetLife's capital position has been improving from the past years, based on improved operating and financial leverage. The company repaid $1.0 billion worth of notes in Feb 2014 and redeemed another $200 million in May.
Meanwhile, the company is on track to achieve $600 million in net pre-tax expense savings and about $400 million from technology efficiencies over the next couple of years. As well, the conversion of equity units from the American Life Insurance Co. (ALICO) acquisition into MetLife's common stock will further raise about $1.0 billion. These factors should further boost the company's capital position, thereby aiding efficient capital deployment.
The share buybacks, along with a 27% dividend hike in Apr 2014 will appreciate shareholder value and boost investors' confidence. Additionally, the resumption of share repurchases will support the company's long-term return on equity (ROE) growth goal of 12-14% by 2016, which was otherwise expected to fall by 100 basis points in the absence of share buybacks.
Even amid the economic downturn of 2007, MetLife has been actively deploying capital by hiking dividends twice since then, as well as by acquiring ALICO in 2010 for about $16 billion and Chilean pension provider - AFP Provida SA - in 2013 for about $2 billion.
MetLife is also focused on improving its risk profile and free cash flow. This is also evident from management's target of improving the ratio of free cash flow to operating earnings from 35% at 2013-end to 45-55% by 2015-2016, assuming gradual improvement in interest rates and regulatory clarity. Additionally, an optimistic long-term growth, particular within the company's U.S. and emerging markets, assures buoyancy amid economic volatility and a low interest rate environment.
Shares Hit New 52-Week High
Following the announcement of the share buyback, fueled by an improved capital position, shares of MetLife hit a new 52-week high at $55.40 on Jun 10. Yesterday's closing price represents a strong one-year return of about 22.2%, against 18.7% clocked by the S&P 500 index.
While MetLife carries a Zacks Rank #3 (Hold), some better-ranked insurersthat warrant a look include Radian Group Inc. ( RDN ), AmTrust Financial Services Inc. ( AFSI ) and Old Republic International Corp. ( ORI ). All these stocks sport a Zacks Rank #1 (Strong Buy).