Investing In Marsh & McLennan Stock Vs. Buying Government Bonds (NYSE:MMC)

prologue

Marsh & McLennan (New York Stock Exchange: MMC) has delivered strong returns over the past decade, with an average annual return of 19% compared to the 12.5% ​​return of the S&P 500.

In 2022, the company’s stock price reached an all-time high, reflecting the company’s performance. Strong financial performance and overall growth in the professional services industry. Currently, stocks are flat due to increased price risk from Fed rate hikes.

In this article, we will review the cash flow statement as the company is a true dividend compounding company. We then assess whether investing in Marsh & McLennan is worth more than buying government bonds. From this point of view, Marsh & McLennan is worth buying.

Company Profile

Marsh & McLennan is a global professional services firm providing advice and solutions in the areas of risk, strategy and people. Since his founding in 1905, the company has grown to become one of the largest and best-known companies in the industry, with operations in over 130 countries. Marsh & McLennan provides a variety of insurance brokerage, consulting and risk management services to a diverse customer base that includes businesses, governments and non-profit organizations.

Earnings were strong in the third quarter

With less capital required to operate, the company generates significant free cash flow, with a free cash flow margin of 16%. Since 2010, free cash flow has increased at his CAGR of 17%. The cash can be used to fund acquisitions that enable further expansion of the company, or it can be distributed to shareholders.

Marsh & McLennan’s third quarter results showed continued growth. Underlying revenues in the third quarter increased 8% year-over-year and adjusted operating income was $851 million, up 12% from the third quarter of 2021. Operating margin up 110 basis points, up 9% adjusted EPS.

In the company’s earnings record, Group President and COO John Q. Doyle said:

Higher inflation is offsetting lower real GDP growth, interest rates are rising and trustee incomes at Marsh & McLennan are rising, and challenging insurance markets are causing a flight to quality. We also believe Marsh McLennan is well positioned to perform, with a track record of staying successful and resilient throughout the cycle.

Rising interest rates promote continued growth of the company by increasing trustee income. Profits increase when the Federal Reserve raises interest rates to his 5%.

Earnings per share is expected to grow by 10% annually over the next few years, according to analysts on the Seeking Alpha MMC ticker page.

Cash flow statement details

Marsh & McLennan has a long history of paying dividends, having increased its dividend per share by an average of 8.8% annually over the past ten years. Company dividends are generally paid quarterly and the amount of the dividend is determined by the company’s board of directors. It currently has a dividend rate of $2.36 and a dividend yield of 1.4%.

A closer look at the cash flow statement shows that the company has consistently increased cash flow from dividends in recent years.

Marsh & McLennan also has a share buyback program and regularly repurchases shares as part of its capital management strategy. A share buyback is a tax-efficient way of returning value to shareholders as it boosts the company’s earnings per share and his dividend per share. In fiscal 2021, the company repurchased approximately $1.3 billion of its stock. This results in a buyback yield of 1.3%.

As Hurricane Ian reduced free cash flow this year, Marsh & McLennan returned more value to shareholders than it generated from free cash flow. In other years, returns to shareholders were lower than free cash flow, indicating consistent long-term returns.

Invest in Marsh & McLennan, or invest in government. Bonds?

A common valuation metric is the price/earnings ratio. A price-to-earnings ratio (P/E) is a financial ratio used to assess the relative value of a company’s stock.

Historically low interest rates have pushed asset prices higher, driving home and stock prices up significantly. Asset prices are generally falling as the Fed calls for a rate hike to his 5% as inflation needs to fall to his normal 2% level.

A good indicator of whether a stock is being fairly valued is its earnings yield. Earnings yield is the reciprocal of the PE ratio. It is calculated by dividing the company’s earnings per share by his current market price per share for that stock, expressed as a percentage. A high profit margin may indicate that the company’s stock is undervalued, and a low profit margin may indicate that the company is overvalued.

Marsh & McLennan’s current PE ratio is 24.9, which is quite high considering the S&P 500’s PE ratio of 20. Conversely, Marsh & McLennan has an earnings yield of 4% and the S&P 500 has an earnings yield of 5%. Both look attractive at the moment. , given that interest rates have not yet reached 5%.

Going forward, earnings per share are expected to grow by an average of 10% annually. He also expects a P/E ratio of 22 after 2023, giving him a 4.5% earnings yield.

Investors can choose to: Invest in Marsh & McLennan, which yields 4.5% earnings (and earnings per share are growing 10% each year), or buy 5% Treasury bonds in 2023. Is it close, but given Marsh & McLennan’s strong growth prospects over the next few years, I would choose to invest in Marsh & McLennan.

Conclusion

Marsh & McLennan is a global professional services firm providing risk, strategy and talent consulting and solutions. Marsh & McLennan offers a wide range of services, including insurance brokerage, consulting and risk management, to a diverse client base that includes businesses, governments and non-profits. The company has grown to become one of the largest and best-known companies in the industry.

Over the last 10 years, the stock has delivered strong returns averaging 19% annually. The company is a true dividend conglomerate, growing its dividend per share by an average of 8.8% annually. In addition to the dividend, the company has a strong share buyback program.

Stocks usually fall when the Fed raises interest rates to 5%. Earnings yield is a good indicator of whether a stock is overpriced. Marsh & McLennan is now valued at a premium to the S&P 500. However, the indicators look favorable as we expect a significant increase in revenue over the next few years. Investors can choose to invest in his 4.5% expected earnings yield in 2023 in Marsh & McLennan (earnings per share grow 10% annually) or invest in government bonds with a 5% yield. .