Too Much Gloom on Brighthouse
September 6, 2017 by Aaron Back
Brighthouse Financial BHF 0.15% had a dim start to life as an independent company. For patient investors, this could be an opportunity.
Shares of Brighthouse Financial have fallen 10% since it was separated from MetLifeMET 1.91% and began trading last week. That is not terribly surprising. MetLife was keen to part with the unit, which specializes in annuities and individual life insurance, because of its poor returns and high sensitivity to interest rates.
Bad luck played a role. Interest rates fell last week, partly due to investor nerves over North Korea. The yield on 10-year U.S. Treasurys has declined from 2.27% to around 2.20% since Brighthouse started trading on August 7.
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It is common for spun-off companies to decline initially, as shareholders of the mother company decide whether to stick around. These situations can also create opportunities for value-oriented investors to get in at a low price. This could be one such case, though it will take a lot of patience and a high tolerance for risk.
The separation from MetLife affords Brighthouse management some interesting opportunities. Brighthouse has been clear with investors that it doesn’t intend to pay out dividends or buy back shares for the next few years.
This gives it some breathing room to make investments in technology and other initiatives that should yield lower costs. Established companies like MetLife, with shareholders that are accustomed to regular payouts, have less flexibility deploying capital.
In a year and a half Brighthouse will also get a chance to renegotiate a contract with MetLife to manage its investments, which could reduce costs further.
Of course much depends on the future path of interest rates and equity markets. Brighthouse’s listing documents say it could achieve a still mediocre return on equity of 9%, assuming a rather benign scenario for stocks and interest rates. In particular, this assumes that 10-year U.S. Treasury yields will rise over the next decade to 4.25%.
If interest rates stay low, Brighthouse won’t be a winner. But investors are also getting compensated for this risk by the company’s low valuation of just 0.57 times adjusted book value. That compares to 0.67 times for Voya Financial , another annuity and retirement company that was spun out of ING in 2013.
Voya shares have doubled from their 2013 initial public offering, even without the tailwind of significantly higher interest rates. For patient contrarians, Brighthouse might be a risk worth taking.
Write to Aaron Back at aaron.back@wsj.com
