Until recently, Metlife Inc (MET) was one of those companies deemed ‘too big to fail’. But it worked its way around that classification — technically called a Systemically Important Financial Institution — and now has some more flexibility to operate.
And it has taken advantage of its new flexibility by recently announcing that it was going to move about two-thirds of its money out of hedge fund investments and into more profitable opportunities, especially in the mortgage sector.
According to Business Finance News, MET has already boosted its mortgage investments from $62 billion last year to $68 billion this year.
Part of this strategy is to counter the tough 6 months the insurer has endured. Some of its problems are beyond its ability to control, but by announcing a proactive strategy to counter current macro market forces, it makes MET’s coming quarters look much brighter.
Hedge funds have been having a tough go of it in recent quarters. Slow growth, a dead bond market and limp currencies have not helped. Neither has the fact that Dodd-Frank legislation makes it increasingly harder to run the kinds of trading operations that caused the financial crisis, and markets have dried up.
Also, another macro factor working against Metlife stock is the fact that for quite a long while after the worst of the crisis, MET was precisely the kind of company you wanted to own. It has tons of cash — all those premiums sit around until the company has to pay — that it puts back into the markets.
When the Federal Reserve started giving away money for free that was a huge bonus to Metlife stock. Much of the reserves it holds need to be as cash equivalent as possible in case they’re needed quickly. If you own an office building, or shopping mall it’s kind of hard to cash out on short notice. That means U.S. Treasuries.
And since the Fed’s generous policy of loaning money at 0% and issuing bonds around 2%, MET and similar financial institutions have been making solid profits.
Why MET’s Loss Is Our Gain
But as the economy groans forward, those kinds of returns are no longer attractive and there’s more appetite for risk among analysts and institutions. The hedge funds were an attempt to be able to seek more growth with a tempered strategy, but it didn’t work out, as we saw in MET’s Q1 statement in early May.
Earnings per share were expected at $1.38 a share. They came in at $1.20. Revenue was off 2.5% compared to the year ago quarter. Operating earnings were off 19%.
Its net income investment was hammered by bad hedge fund performance. The stock is off almost 7% year to date, largely because of this very weak quarter.
But MET has been around for more than 140 years. It has seen its share of tough times. And while it might not be “Too Big To Fail,” it’s still the largest insurance company in the US. And you don’t get there without a long-term game plan.
By shifting its assets so significantly, management is trying to show the Street that it is doing everything possible to get the ship pointed in the right direction again.
But MET’s loss is our gain. This is a great price to buy into this rock-solid company. And right now, it’s throwing off a 3.6% dividend yield. That is a very impressive considering the average dividend yield for the S&P 500 is about 2%.
Richard Band’s Profitable Investing advisory service helps retirement savers outperform the market without losing a minute of sleep along the way. His straightforward style and low-risk value approach has won seven Best Financial Advisory awards from the Newsletter and Electronic Publishers Foundation.
