Aflac Incorporated (AFL) is the world's largest underwriter of supplemental cancer insurance. Aflac also sells life, health, Medicare supplement, accident and long-term convalescent care policies. Aflac, founded by 3 brothers in 1955, gives more than 50 million people peace of mind that they will receive financial assistance in the case of illness or a serious accident.
Aflac operates in Japan and the United States. In 2012, Japan operations accounted for 80% of company profits. Most of this was driven by medical, cancer and life insurance products. Aflac is the number one insurance company in Japan in terms of policies in force. About one in every four households in Japan currently has an insurance policy with Aflac.
Outstanding Historical Operating Results
Over the past decade, Aflac has had absolutely outstanding operating results. The company has managed to grow net profits at a compound annual growth rate of just over 11%.
They have managed to grow total income by a compounded annual growth rate of 7.5% which includes income from policy premiums and investment income.
More importantly for investors, earnings per share compound annual growth rate over the past decade has been just under 12.5%. For an individual investor, EPS represents their allocated portion of profits for each share owned. This is the biggest driving factor of wealth created by owning stock in a company.
Aflac has managed to have such wonderful operating results despite headwinds from the largest financial crisis in recent history beginning in 2008.
|EPS||Net Profits ($mill)|
*2013 figures include first 3 quarters results plus estimate for 4th quarter not yet reported.
Take a minute to admire the beauty of those figures. Look how almost every year (with the exception of 2008 and 2011) the company has been able to grow their profits from previous year's results. This is a feature demonstrated in the best companies. Companies that investors should want to own should be doing this almost year in year out with few exceptions.
A Dividend History to Make the Duck Proud
The Aflac duck campaign focuses on letting potential consumers know that Aflac will be there in your time of need providing you an income if you shall become injured or ill.
Well, for investors, Aflac is also very reliable when it comes to income. Aflac boasts a 3 plus decade long dividend streak. The company has been paying out annually increasing dividends to shareholders for the past 31 years.
Over the past decade, Aflac has grown their dividend distribution to shareholders by a compound annual growth rate of 16.82%. Most recently, Aflac announced a dividend increase of 5.7%, which though lower than historical increases, the raise still keeps investor income ahead of inflation.
It should be noted that Aflac showed their commitment to dividend growth by continuing their streak through the financial crisis of 2008.
Such a high dividend growth rate might worry potential investors that future dividend increases could decrease. However, there is plenty of room for Aflac management to keep growing dividends as they only pay out roughly 20% of earnings to shareholders through dividends.
Currently, Aflac boasts a dividend yield of 2.25%. While income investors may prefer a higher starting yield, they can be sure that their income from Aflac stock will increase going forward.
Increasing Shareholder Value
If consistent EPS and dividend growth aren't enough to get you excited, take a look at Aflac's commitment to reduce outstanding share count.
Over the past decade, Aflac has made a strong effort to reduce outstanding shares thus increasing each remaining shares value. From 2002 to 2012, Aflac management decreased outstanding shares by almost 10%. Recently, Aflac announced authorization for management to purchase and retire another 40 million shares.
Each share that is retired by Aflac means that each remaining share is worth a bigger portion of the company. Retiring outstanding shares is one way for a company to return value back to shareholders along with dividend payments.
One of the Best-Valued Company Currently Available
Currently, Aflac offers one of the best valuations available in the stock market. Not many companies offer such consistent, reliable and positive operating results as Aflac over many years. Most companies with such outstanding operating results are currently trading with P/E multiples of 20 or higher.
Aflac is currently trading at a P/E of just over 10. This gives the stock a current earnings yield of 9.9%. Compare this earnings yield with the long term U.S. treasury yield of 3.75%.
Looking over Aflac's historical P/E, they have an average P/E of 14.4 over the past decade. However, Aflac has been trading at a much lower valuation since the financial crisis of 2008 due to stock investors placing a higher risk perception for financial companies.
At this time, investors can get Aflac at a great value compared to many other solid blue chip companies. Investors could currently pay roughly 10 for each $1 in earnings for Aflac. Compare that to roughly $21 for each $1 in profits from Coca-Cola Company (KO), $17 for each $1 profits from McDonald's (MCD) or $15 for each $1 profits from Wal-Mart (WMT). Compared to some of the most solid dividend growth companies, Aflac currently offers a great value.
Currency Conversion Effects
While I'm definitely positive on Aflac, I'm not naive enough to believe all is roses for this company.
Due to the majority of Aflac's profits coming from Japan, the company's stock is influenced by the Japanese Yen valuation compared to the U.S. Dollar. A weaker Japanese Yen has a heavy downward effect on Aflac's financial results causing shareholders to be cautious.
Other Positive Drivers of Aflac
Driving Aflac forward, the company has recently released a new medical insurance product aimed to appeal to younger customers in Japan. This new product, along with an agreement to sell cancer policies through Japanese post offices should lead to higher premium incomes in the near future. By selling policies through Japanese post offices, Aflac could add up to 20,000 new sales points for their products.
With an improving economy, the idea that supplemental insurance is a good idea will continue to grow in both Japan and the United States. Look for Aflac to continue growing profits going forward much like it has been doing since the company's start in 1955.