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Why Should You Retain Marsh & McLennan in Your Portfolio?

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Marsh & McLennan Companies, Inc. (MMC - Free Report) has been in investors' good books on the back of its strategic initiatives, which led to its business expansion.

It retained investors' favorable sentiment by maintaining its beat streak in all the last four quarters, the average being 8.3%. This, in turn, underlines its operational excellence.

Marsh & McLennan’s trailing 12-month return on equity (ROE) reinforces its growth potential. The company’s 31.8% ROE betters its industry average of 27.8%, reflecting its efficiency in utilizing the shareholders’ funds.

Its operating performance has been favourable for the past many years, attributable to its diverse product offerings, a wide geographic footprint and strong client retention. Its revenues have been increasing consistently since 2010 (except in 2015, which saw a revenue dip by just 0.4%). 2019 even marked the highest annual revenue growth rate for the company in 20 years, which is pretty impressive. In the first six months of 2020, the company’s revenues of $8.8 billion were up 5% on the back of its solid Risk and Insurances Services Segment.

Acquisitions form one of the core growth strategies at Marsh and McLennan. The company made numerous purchases within its different operating units that enabled it to explore uncharted geographies, expand within the existing ones, foray into new businesses, develop new segments and specialize within its presently-running businesses. The company’s last-year acquisition of JLT expanded its capabilities ever since. The Risk and Insurance Services segment completed two acquisitions in the first quarter of this year. In the first six months of 2020, the company spent $1.2 billion on its buyouts.

The company has been gaining traction from its Marsh and Mercer business lines. Last month, Mercer announced that its retirement plan solution crossed the $1-billion mark in assets under management (AUM). Notably, Mercer Wise 401(k), which is a bundled solution, is part of Mercer’s expanding Outsourced Chief Investment Officer (OCIO) business.

Marsh (Singapore) recently inked a deal with Triterras Fintech to provide credit insurance via a digitally-streamlined process on its Kratos platform. With this innovation, Marsh expects the insurance industry to utilize digital tools for boosting operational efficiency as well as improving customer relations.

The company has maintained a strong balance sheet and financial flexibility so far including consistent cash flow generation for the past many years. Its disciplined capital management through share buybacks and dividend payments cemented investors’ confidence in the stock. In July 2020, the company’s the board of directors hiked its quarterly cash dividend by 2.2%, reflecting its 11th consecutive year of dividend increase. The company’s current dividend yield of 1.6% is higher than the industry average of 1.3%. Although it doesn’t expect to buy back shares for 2020, we remain hopeful that the repurchase activity will be resumed once the pandemic effect ends.

However, the company’s operating expenses escalated over the last several years due to higher compensation and benefits. The same further increased 14.7% and 1.2% in 2019 and during the first six months of 2020, respectively. A persistent escalation of expenses might weigh on the company’s margins.

Zacks Rank and Price Performance

Shares of Marsh & McLennan, which currently carries a Zacks Rank #3 (Hold), have gained 21.5% in the past year compared with the industry’s growth of 14.1%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The company’s peers, namely Arthur J. Gallagher & Co. (AJG - Free Report) , Brown & Brown, Inc. (BRO - Free Report) and Aon plc (AON - Free Report) have also rallied 24.5%, 30% and 11.6%, respectively, in a year’s time.

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