Marsh & McLennan Cos. Inc. (MMC) reported fourth-quarter 2014 operating earnings per share of 66 cents, in line with the Zacks Consensus Estimate but surpassed the year-ago quarter figure of 57 cents. Notably, the company has delivered 14 straight quarters of double-digit earnings growth along with a trailing four-quarter average earnings beat of 3.3%.
Decent revenue growth across segments and controlled expenses led to the upside and drove margins. However, these were partially offset by nil investment income and higher debt.
Quarterly Details
Operating net income, excluding one-time items, increased 14.9% year over year to $363 million. On a reported basis, Marsh & McLennan recorded net income of $267 million or 48 cents per share against $303 million or 54 cents a share in the prior-year quarter, primarily on lower share count.
Consolidated revenues were $3.25 billion, up 4.2% year over year and 6% on an underlying basis. The top line, however, slightly missed the Zacks Consensus Estimate of $3.31 billion.
Meanwhile, total operating expenses rose 3.2% year over year to $2.71 billion. This was attributed to operating expenses which climbed 2.6% to $814 million, and an increase of 3.4% in compensation and benefits to $1.9 billion.
Consequently, adjusted operating margin improved to 17% from 16.3% in the year-ago period. Meanwhile, interest expenses declined 16.3% to $36 million, although cost of debt extinguishment rose to $137 million against $24 million in the year-ago period. Investment income was nil against $11 million a year ago.
Segment Results
Revenues for the Risk and Insurance Services segment were $1.69 billion, up 4% year over year and 6% on an underlying basis. Moreover, adjusted operating income scaled up 8.6% year over year to $355 million, reflecting decent performance at Marsh and Guy Carpenter.
Marsh's revenues came in at $1.47 billion, up 4% on both year-over-year and underlying basis, driven by modest growth in new businesses and across different geographical regions. Underlying revenues grew 5% in international operations reflecting growth of 3% in Latin America, 6% in the Asia Pacific, 5% in EMEA (Europe, the Middle East and Africa) and 3% in the U.S.-Canada region.
Guy Carpenter's revenues during the reported quarter were $212 million, up 1% year over year and 3% on an underlying basis.
The Consulting segment's revenues rose 5% year over year and 8% on an underlying basis to $1.57 billion. Additionally, adjusted operating income grew 13.1% year over year to $251 million.
Mercer's revenues were $1.11 billion, up 2% year over year and 5% on an underlying basis. The segment's retirement operations generated revenues of $343 million, up 5% on an underlying basis. Additionally, Health revenues grew 4% to $380 million, while revenues from Talent rose 2% to $169 million. Revenues from Investments increased 12% to $214 million, all on an underlying basis.
Moreover, Oliver Wyman’s revenues rose 12% year over year and 15% on an underlying basis to $460 million in the reported quarter.
Full-Year 2014 Highlights
For full-year 2014, Marsh & McLennan’s operating earnings per share stood at $2.82, a penny above the Zacks Consensus Estimate. However, earnings were noticeably higher than $2.48 a share recorded in 2013.
Operating net income jumped 12.6% year over year to $1.56 billion. On a reported basis, net income grew to $1.44 billion or $2.61 per share in 2014, up from $1.35 billion or $2.42 per share in 2013.
Consolidated revenues grossed $12.95 billion, up 5.6% year over year and 5% on an underlying basis. However, top line slightly lagged the Zacks Consensus Estimate of $13.02 billion. Total operating expenses rose 4.6% year over year to $10.65 billion, while adjusted operating margin improved to 18.1% in 2014 from 17.4% in 2013.
Financial Update
In 2014, Marsh & McLennan’s total investment income, including private equity investments, came in at $37 million against $69 million recorded in 2013. Capital expenditure declined 8.2% year over year to $368 million at 2014-end.
Marsh & McLennan exited 2014 with cash and cash equivalents of $1.96 billion, lower than $2.30 billion at 2013-end. Long-term debt of $3.38 billion was higher than that of $2.62 billion at 2013-end.
As of Dec 31, 2014, Marsh & McLennan’s total assets appreciated to $17.84 billion, while total equity decreased to $7.13 billion from 2013-end.
In Oct 2014, the company redeemed notes worth $230 million (interest of 5.75%) that was due in Sep 2015, and another set of notes worth $400 million (interest of 9.25%) that are due in 2019. Marsh & McLennan incurred expenses worth $137 million associated with early termination of this debt.
Share Repurchase Update
Marsh & McLennan bought back 3.7 million shares for $200 million during the reported quarter, while 15.5 million shares worth $800 million were repurchased in 2014.
On May 15, 2014 the board sanctioned a new share repurchase program worth $2.0 billion without any expiry period. This superseded the previous share buyback that had been expanded to $1.0 billion in May 2013.
The company is likely to have about $1.76 billion available for repurchases at the end of 2014.
Dividend Update
On Jan 14, 2015 the board of Marsh & McLennan announced a regular quarterly dividend of 28 cents per share, payable on Feb 13, 2015 to shareholders of record as on Jan 26.
On Nov 17, 2014, the company paid a quarterly dividend of 28 cents a share to shareholders of record as on Oct 10. This was raised by 12% from 25 cents in May 2014. Marsh & McLennan is now shelling out $1.12 per share annually.
Zacks Rank
Currently, Marsh & McLennan carries a Zacks Rank #3 (Hold).
Promising Stock Picks
Better-ranked insurers like Allstate Corp. (ALL), Validus Holdings Ltd. (VR) and Erie Indemnity Co. (ERIE) are worth considering. All these stocks have a Zacks Rank #2 (Buy).
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