MMC Marsh and McLennan Companies Inc

Marsh & McLennan Companies Inc. (MMC) reported its second-quarter 2012 operating earnings of 61 cents per share, a couple of pennies ahead of the Zacks Consensus Estimate.

The results were modestly higher than the year-ago quarter’s earnings of 50 cents per share. Operating net income, which excludes one-time items in both the periods, escalated 20.1% year over year to $335 million.

On a reported basis, Marsh & McLennan recorded net income of $329 million or 59 cents per share in the reported quarter, handily up from $282 million or 51 cents per share in the prior-year quarter.

With the steady recovery in the economic environment, Marsh & McLennan posted improved results on account of modest underlying revenue growth and new business development across its businesses, which also drove the operating margin. The lower-than-expected expense growth also supported the bottom line, partially offset by high tax expense.

Consolidated revenues were $3.03 billion, climbing 3.3% on both year-over-year and 5% on an underlying basis. However, it lagged the Zacks Consensus Estimate of $3.08 billion.

Further, total expenses inched up 1.8% year over year to $2.51 billion as compensation and benefits grew 2.8% to $1.78 billion, while other expenses dipped 0.4% to $732 million. Additionally, tax expenses escalated to $144 million against $129 million in the year-ago quarter. Nevertheless, adjusted operating margin improved to 17.3% from 15.8% in the year-ago period.

Segment Results

Revenues for the Risk and Insurance Services segment were $1.7 billion, up 5% year over year and 6% on an underlying basis. Moreover, adjusted operating income jumped 14% year over year reaching $402 million, reflecting improved performance at Marsh and Guy Carpenter.

Marsh's revenues came in at $1.4 billion, up 4% year-over-year and 6% on an underlying basis, driven by strong new businesses and growth across geography in the quarter. Underlying revenue for international operations grew 7%, reflecting 14% growth in Latin America, 10% in Asia Pacific and 5% in EMEA. Moreover, underlying revenue improved by 4% in the U.S.-Canada region.

Guy Carpenter's revenues during the reported quarter were $275 million, up 7% year over year and 10% on an underlying basis.

The Consulting segment's revenues moved up 2% year-over-year and 4% on an underlying basis to $1.3 billion. Additionally, adjusted operating income grew 14% year over year to $154 million.

Mercer's revenues stood at $960 million, up 2% year-over-year and 3% on an underlying basis. Mercer's retirement operations generated revenues of $267 million, slightly improving by 1% on an underlying basis.

Additionally, Health & Benefits grew 6% to $255 million, whereas revenue from the Talent, Rewards & Communications and Outsourcing edged up 1% year over year to $132 million and $178 million, respectively. Revenue from Investments increased 7% to $128 million.

Oliver Wyman’s revenues hiked 2% year over year and 8% on an underlying basis to $381 million in the reported quarter.

Financial Update

During the reported quarter, Marsh & McLennan’s total investment income, including mark-to-market gains in private equity investments, grew to $4 million against an investment loss of $6 million in 2011. Meanwhile, capital expenditure increased 30.7% year over year to $98 million.

Marsh & McLennan exited the reported quarter with cash and cash equivalents of $1.5 billion, down from $2.1 billion in 2011. Long-term debt marginally declined to $2.66 billion from $2.67 billion at the end of 2011.

As of June 30, 2012, Marsh & McLennan’s total assets depreciated to $15.20 billion, while total shareholders’ equity increased to $6.34 billion from 2011-end.

Additionally, the company bought back 3.1 million shares for $100 million during the reported quarter, while $453 worth of stock remains available for repurchases under the current authorization.

Dividend Update

On May 17, 2012, the board of Marsh & McLennan announced a 5% hike in its quarterly common stock dividend to 23 cents per share from the prior 22 cents. The increased dividend is payable on August 15, 2012 to the shareholders of record as on July 11, 2012.

On March 14, 2012, the board of Marsh & McLennan announced a quarterly dividend of 22 cents per share on its common stock, which was paid on May 15, 2012 to the shareholders of record as on April 10, 2012.

Our Take

The steady growth momentum of Marsh & McLennan over the past few quarters reflects its ability to sustain fundamental growth through new business generation and client retention, which is crucial amid the company’s antitrust litigation charges coupled with a soft pricing environment.

Overall, as a leading global broker, Marsh & McLennan has a history of outperforming its peers due to its size, diverse product offering, global presence and technical expertise. Despite sluggish organic growth, the company is still a dominant player in its industry, quite next to the leading Aon Corp. (AON).  Currently, Marsh & McLennan carries a Zacks Rank #3, which translates into a short-term Hold rating and long-term Neutral recommendation.

 
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