On Jan 5, 2015, we issued an updated research report on Marsh & McLennan Companies, Inc. (MMC).
Marsh & McLennan’s third quarter earnings surpassed the Zacks Consensus Estimate on the back of decent revenue growth across segments and higher investment income, partially offset by higher expenses.
Marsh & McLennan’s strategic acquisitions and well-executed restructuring initiatives generated new clients, triggering growth. With the view to further expand business globally, the company extended its coverage to Asia-Pacific, Africa and Latin America, thereby substantially contributing to top-line growth and insurance margins.
Marsh & McLennan remains focused on cost reduction and expense management. Over the last couple of years, the company implemented cost-saving initiatives by divesting redundant units, acquisitions and moderating its expenses on compensation and benefits and other operations. These helped the company enhance its organic growth and operating leverage, while resulting in cost efficiency and boosting operating income.
Marsh & McLennan is focused on returning more value to its shareholders. Based on the strength of its financial position, the company’s board of directors approved a 12% dividend hike in May 2014. It also engages in share buybacks and has repurchased shares worth $600 million in the first nine months of 2014 under the share repurchase program of $2.0 billion initiated in May 2014. With a strong balance sheet and the ability to generate a healthy cash flow, the company is expected to indulge in more buybacks going forward, thereby sharing more profits with investors.
Despite increased cash outflow due to multiple acquisitions in the last three years, proceeds from strategic divestitures of Kroll and Marsh’s BPO business provided greater liquidity and financial flexibility for business requirements. While these acquisitions complement the company’s goal of global expansion, we believe that the growth contributions streamline its resources efficiently to benefit from the current financial environment and amplify its operating leverage.
Although the company is taking up restructuring and cost reduction initiatives to accelerate growth, operating expenses continue to rise on account of increased tax and legal expenses, compensation, benefits and claims along with other underlying expenses.
Marsh & McLennan has also been slapped with several lawsuits over the years. Lawsuits and related settlement charges not only affect a company’s financials, but also hamper its goodwill leading to increased expenses and hence contraction of margins. Moreover, these lawsuits have affected new production and customer retention initiatives of the company.
The stiff competition and pricing pressure have also affected the new business production of the company. The consistent fall in asset management fees in alternative investments, due to the change in demand-supply dynamics in the market, reduces a primary revenue source and weakens the competitive leverage in the market.
Additionally, UK, Canada, Australia, France and Bermuda account for Marsh & McLennan’s 60% of the non-U.S. pre-tax income. The dependence on international business raises caution on account of currency fluctuations, interest and tax rates.
Currently, Marsh & McLennan holds a Zacks Rank #2 (Buy).
Other Stocks to Consider
Investors interested in the insurance industry can consider stocks like The Allstate Corp. (ALL), Aon plc (AON) and eHealth, Inc. (EHTH). While Allstate sports a Zacks Rank #1 (Strong Buy), Aon plc and eHealth hold the same Zacks Rank as Marsh & McLennan.
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