(By Mani) Metlife, Inc.
) is preferred over the Prudential Financia
) among the large capitalization, international plays in the insurance space.
The first thing that favors the New York-based Metlife is its strong and consistent performance in terms of EPS and return on equity (ROE), while Prudential's results on these two metrics have been more mixed.
Metlife has beat consensus in each of the past six quarters, whereas Prudential has done this only 3 times during this timeframe.
"We argue that MET has demonstrated consistently lower EPS variance, both on a reported and normalized basis, compared with PRU," UBS analyst Suneet Kamat said in a client note.
The volatility of Metlife's quarterly EPS has been 7 percent over the past six quarters, well below Prudential's 20 percent figure.
A near-term opportunity that favors Metlife over Prudential is their respective dividend outlooks and the implications for dividend yield. Based on current information, both companies will pay an annual dividend in 2012.
Unless Metlife exits bank holding company status, it would announce a 2012 annual dividend of 74 cents per share in October, consistent with its 2007-2011 payments.
Last May, Metlife said it will shift to a quarterly dividend payment schedule starting in 2013, while Prudential has not announced any change to its historical practice of paying an annual dividend.
This difference means that Metlife investors will essentially collect $1.30 in dividends from the fourth quarter of 2012 to the third quarter of 2013, assuming no change in the dividend rate.
"We feel that MET's expected move to a quarterly dividend payment in 2013 should result in a dividend yield of 3.7% over the 12-month period ending September 2013, assuming no dividend increase. This would compare to a 3.3% forward yield at PRU, assuming a 25% dividend increase in 2012," Kamat said.
Assuming Metlife increases its 2012 dividend to $1.10, its forward yield would be 5.5 percent, compared to Prudential's 4 percent, assuming Prudential increases its dividend by 50 percent. However, Metlife's dividend yield advantage relative to Prudential would diminish to the extent Prudential opts to pay a quarterly dividend on a go forward basis.
"While we encourage PRU management to move to a quarterly payment schedule, our understanding is that the company will maintain its annual dividend practice for now. As such, we acknowledge that MET's yield advantage should be viewed as a near-term opportunity," the analyst said.
In addition, the sector's cost of equity is expected to remain above its ROE, putting a ceiling on price to book (P/B) multiple expansion. While management teams may have some level of control over their ROE improvement prospects, they have a lesser ability to reduce stock betas, at least in the near-term.
"That said, we feel companies can influence their betas over time by changing their business mix and doing so in a manner that lowers their range of ROE outcomes. In our view, MET appears to be more keenly focused on this issue by prioritizing underwriting business over operations that are more sensitive to the capital markets," Kamat noted.
On the other hand, it appears that Prudential's earnings contribution from capital market sensitive businesses will remain relatively stable going forward under its current strategy.
"While PRU is likewise focused on ROE expansion, our sense based on management commentary is its strategy in this regard will not reflect a material change in its overall business mix, which we feel does not provide a roadmap in terms of beta reduction, and by extension, a lower cost of equity," the analyst said.
Meanwhile, global underwriting businesses should have low volatility in an uncertain capital markets environment and should help lower Metlife's cost of equity. In conjunction, the company appears to be de-emphasizing growth in market- sensitive products such as variable annuities, and move investors will favor it given the tail-risk associated with this product offering.
"We argue these factors combined with MET's current 0.7x P/B present a compelling story. On the other hand, we argue that PRU's current valuation is a more fair reflection of its near-term ROE prospects," Kamat added.
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