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Introduction

Using my portfolio fundamental rules (here), I used the CCC list (here) to select a champion to research. Aflac (NYSE:AFL) is a holding company for businesses in Japan and the United Sates that focus mainly on supplemental life and health insurance.

Quick Facts from Google Finance

Price (12/9/2013)

$66.70

P/E Ratio

10.20

Dividend Payout

Quarterly

Prev. Year Dividend

$1.40

Yield

2.2%

Prev. Year EPS

6.54

Payout Ratio

39%

5-Year Beta

2.3

From the most recent quarterly report, Aflac Japan increased its premium income 6.7% (local currency). This had a disproportionate impact on net income, which increased 16.2%. On the United States side, the improvement was smaller. Premium income was up only 3.1% with net income being up 4.2%. The company earns the majority of its revenue in the Japan market. This exposes revenue performance to exchange rates that can hurt or benefit the company. Looking at local currency helps present a better picture of company performance.

Also effective for the fourth quarter was a dividend increase from 0.35 to 0.37. The company traditionally increases the dividend for the 4th quarter every year. The 6% increase is rather small as compared to the historic dividend growth rate.

I know many of you are interested in the management team. As I consider the next 5 years at the company there is one thing to note. The CEO has been an officer at the company for more than 20 years and has been in the CEO position for over 12 years. He is 62 years old. This leads me to believe that leadership is coming up for a transition in the next few years. The current president/COO of Aflac United States, Paul Amos has been in his position since 2007. In 2008, he was asked to participate in more of the line of work with Japan. He is the most likely replacement and my guess is that this seasoned professional will do a great job during the transition. In his current role, he oversees the majority of the United States line of business from recruiting the giant sales force to marketing. The business has been going full steam and produced great results for many here on Seeking Alpha. My opinion is he, and more importantly the company, will continue to perform if he gets promoted.

Financial Performance

12/03

12/04

12/05

12/06

12/07

12/08

12/09

12/10

12/11

12/12

TTM

Revenue / Share

21.92

25.72

28.29

29.13

31.16

34.57

38.92

43.82

47.24

54.05

52.30

EBITA / Share

2.29

3.48

4.43

4.55

5.11

4.06

4.92

7.84

6.7

9.72

10.57

EPS (Diluted)

1.52

2.52

2.92

2.95

3.31

2.62

3.19

4.95

4.18

6.11

6.54

FCF / Share

--

8.65

8.7

8.72

9.33

10.37

13.13

14.77

23.1

31.86

22.73

Share Price

36.18

39.84

46.42

46

62.63

45.84

46.25

56.43

43.26

53.12

66.64

Dividend / Share

0.3

0.38

0.44

0.55

0.8

0.96

1.12

1.14

1.23

1.34

1.4

Debt to Equity

0.21

0.19

0.18

0.17

0.26

0.52

0.62

0.28

0.32

0.67

0.34

Payout Ratio

20%

15%

15%

18%

24%

36%

35%

23%

30%

22%

23%

Shares Outstanding

522.1

516.4

507.7

501.8

494

478.8

469.1

473.1

469.4

469.3

467.4

P/E

23.8

15.8

15.9

15.6

18.9

17.5

14.5

11.4

10.3

8.7

10.2

Source: Guru Focus

Taking a quick look at the 10-year financial performance shows all the things that an investor would like to see. The EBITA/Share has improved over the years. There was a huge spike in 2010 that has come back in line with historical values. FCF continues to grow with only modest increases in Debt/Equity. Important to us DGI folks, the payout ratio over the past 10 years is only up 15%. The dividend payout has compounded at a 17% CAGR over the same time. That means the company is not hiding growth in the dividend by increasing the payout ratio. The last good note for the investor is the reduction in shares outstanding by 10% over the past 10 years.

Price Calculation

TTM Earnings

$6.54

Year 1-5 Growth

8%

Year 6-20 Growth

4%

Discount Rate

12%

Current Price

$66.70

DCF

$71.22

Year 5 Earnings

$8.90

5-Year Avg P/E

11.0

Price @ 5 Year

$98.11

For the price calculation, I look at it two different ways. First, I did a DCF based on earnings. I take the estimated growth rate of 8% for 5 years and then halve the expected growth rate for an additional 15 years. This is discounted at 12% and produces a price of $71.22. This is 6% above the current market price.

For the second method, I use the estimated earnings at 5 years based on the 8% growth rate. This is then multiplied by the 5-year historic P/E average. This produces a 5-year price target of $98.11.

Dividends

YearDividend PaymentCAGR
20131.42--
20121.346%
20111.237%
20101.148%
20091.126%
20080.968%
20070.8010%
20060.5515%
20050.4416%
20040.3816%
20030.3017%

Source: Guru Focus

Looking at the historic dividends shows a decent dividend growth rate for a quality organization. As mentioned above, the last year growth rate was only a modest increase. The increase is a bit inconsistent over the 10-year historic period. All are inflation beating improvements to the yield.

Scoring / Conclusion (sort of)

Category

Performance

Goal

Pass / Fail

Yield

2.1%

2.9%

Fail

Chowder Rule

23.2%

12.0%

Pass

Modified Chowder Rule

7.0%

12.0%

Fail

5-Year EBITA Growth

21.1%

0.1%

Pass

Trailing P/E

10.2

15.0%

Pass

Debt to Equity

34.0%

50.0%

Pass

Dividend Payout

23%

60%

Pass

Price Protection

Average

Average

Pass

Min. Share Price

$66.70

$5.00

Pass

Do I know the Business Model

Yes

Yes

Pass

Total Pass

8

Taking a look at the scoring sheet, I see a pretty solid performance of 8 out of 10. The two Failing scores are Yield and Modified Chowder Rule. The Modified Chowder Rule uses the yield as part of the calculation. As a DGI, these are two of the important fields that I want to see pass. At the current yield of 2.1% I would like to see a bit faster growth in the dividend before I invest. The balance sheet looks solid and the company appears set for continued dividend growth. The current price versus my calculated price offers 6% protection.

I would like to see a bit more and I know many of you will tell me I am being greedy. With a dividend 12% over SPY and not near my target of 50% over SPY I am torn. I believe this would be a good additional to any retiree's portfolio. As for someone in the accumulation phase, I am just not sure.

Source: Should Aflac Be Added To My Dividend Growth Accumulation Portfolio?