Dear Mr. Berko:

Please tell me about Marsh & McLennan’s business and profitability. What effect do you think New York Attorney General Eliot Spitzer’s actions will have on the company? Do you think the 5 percent dividend is safe? Because the stock dropped from the high $40s to $25 in such a short period of time, do you think, in spite of all its troubles, that a 500-share purchase would be a good gamble?

F.W., Oklahoma City

Dear F.W.:

Marsh & McLennan Cos. Inc. (MMC-$27.97) runs three extremely profitable business segments: (1) risk and insurance coverage, (2) investment management and (3) consulting services.

During the past decade, MMC’s revenue growth has been spectacular, going from $3.4 billion in 1993 to $11.4 billion in 2003. Earnings-per-share growth has been just as impressive (from 75 cents in 1993 to $2.85 last year) and MMC’s dividend surged each year, rising from 45 cents in 1993 to $1.20 in 2003. This year, the company projects continued record-setting pace as management expects to report $12.5 billion in revenues, earnings of $3.07 per share and a dividend of $1.36. Those are impressive numbers and MMC is an impressive organization, potential Gov. Spitzer notwithstanding.

MMC derives 64 percent of its revenues from the United States, about 15 percent from the United Kingdom, 11 percent from Europe and 10 percent from other areas. The company is recognized throughout the world as a global powerhouse in the insurance brokerage business.

MMC’s risk and insurance services bring in 60 percent of revenues and 66 percent of profits. Management solidified its position as the world’s largest insurance brokerage via its 1997 purchase of Johnson & Higgins, for which it paid $1.8 billion, a $2.2 billion purchase of English-based Sedgwick Group in late 1998 and its 2004 purchase of Kroll for $1.9 billion. In this area, MMC is unstoppable, untouchable and incomparable.

The company’s investment management services accounted for 17 percent of 2003 revenues and 20 percent of profits. MMC owns the Boston-based Putnam Group, one of the oldest and most prestigious mutual funds in the world with nearly $210 billion under management. The Putnam Group of mutual funds is represented by nearly every U.S. brokerage firm and has enjoyed a solid, conservative reputation in the industry for over 70 years.

Finally MMC’s consulting services (23 percent of revenues and 14 percent of profits) are represented by the distinguished Mercer Inc., which may be the world’s largest business consulting firm. Mercer’s people provide consulting to industry in the areas of human resources, strategy, marketing, operations, organizational changes, identity issues and economics.

That’s what MMC does for a living and it does all these things well and honestly.

At least that’s what the world thought until a political aspirant by the name of Eliot Spitzer began to think about running for governor of New York. Spitzer kicked MMC’s Putnam in the shin early this year (you’ve read about the mutual fund scandals) and Putnam disgorged $110 million in fines. (Please, Eliot, tell us what you did with the billions of other dollars you collected from Microsoft, Merrill Lynch, the recording industry, Richard Grasso and legions of other industries.) In the process, worried fund holders cashed out nearly $50 billion in Putnam chips. Those were hard blows to take.

Now Spitzer has delivered MMC a second whammy and charged management with bid rigging of insurance quotes obtained for its clients.

That’s the whole situation in a nutshell. In early October, MMC was trading at $47. By mid-October, the stock was $24 a share. The company is still a world player and a formidable company. Long-term trends (especially in Europe and the United Kingdom) are extremely favorable and MMC’s relationship with its client base remains strong.

Still, many investors are concerned that Spitzer’s lawsuit may encourage clients to leave the firm and potentially eliminate an important source of MMC’s usual revenue stream. Putnam has to bite the bullet as it struggles to attract investors and regain its once-pristine image. But the most immediate concern is: how much business will MMC lose because its contingent-commission revenue base is no longer tolerated?

A second uncertainty concerns the size of the company’s fines and which executives may get jail time with Martha Stewart.

Lastly, the trustworthiness of MMC’s risk and insurance services business has been seriously challenged. Everyone whose ox has been gored will be squealing.

Standard & Poor’s thinks MMC is headed for $19 to $20 and Morningstar recommends a purchase at the current price with a 12-month target of $39 a share. I agree with Morningstar and bought MMC for my personal account in October. I think the company’s $1.36 dividend is secure and the 5 percent current yield is attractive.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net.