- Aflac currently has the authorization to repurchase 12.2% of its existing stock.
- Aflac has been raising its dividend for 31 years, and despite the weak yen, still delivers dividend growth in the 6-8% range.
- The weakening yen against the dollar has pushed Aflac's valuation to historical lows in normal economic times.
One of the more underrated companies out there right now is supplemental health and life insurance provider Aflac (NYSE:AFL). The company hasn't been getting all that much press lately because 77% of the company's profits originate in Japan, and the company's financial performance has suffered in response to the yen's weakening against the dollar. Less than a year ago, it only took 77 yen to equal a dollar. Now, it takes 102 yen to equal a dollar.
Despite this difficulty, Aflac has still managed to grow earnings from $5.86 to $6.15 (as of year-end 2013) for a gain of 4.94%. In a way, Aflac's profits have a "coiled spring" effect-when the yen's strength improves against the dollar, Aflac shareholders could suddenly find themselves experience year-over-year growth in the 15-20% range if we start to see something resembling a reversion to the mean.
More interestingly, Aflac's management team is responding intelligently to the cheapness of the shares to engage in large buybacks. Here's the gist of it from Business Wire:
"Aflac Incorporated's board of directors authorized the purchase of up to 40 million shares of its common stock. This authorization is in addition to the 16.9 million shares that remained under a previous authorization as of September 30, 2013, bringing the total number of shares available for purchase to approximately 56.9 million. The company anticipates that the repurchase of shares will be conducted from time to time in open market or negotiated transactions, depending on market conditions."
Aflac is sitting on the authorization to buy back 56.9 million shares. As of its last report, the company has 466 million shares outstanding. This gives Aflac management the current authority to repurchase and retire up to 12.2% of the company's outstanding stock. Of course, that information is only useful if we can tie it to a specific time period; Aflac management has expressed a willingness to spend $1.0 billion per year buying back stock. At current market prices of $62 per share, this means that Aflac will be retiring around 3.5% of its outstanding stock per year, so it will probably take about four years for the company to retire a little over a tenth of its outstanding stock.
What I particularly like about the move is that Aflac management is actually showing a willingness to "buy low" when it comes to running a share repurchase program, and thus, maximize value for its owners. The current stock price puts Aflac at 10x earnings and at 172% of its book value (which is a little over $36 per share). This is far, far below where Aflac traded before the financial crisis hit. From 1998 to 2007, Aflac's book value traded in a range of 235% to 320%. And its P/E ratio was in the range of 16.3 to 23.8 during that same time frame. Aflac's shares are cheap based on any measure of the stock's trading history in non-crisis times, and the management is taking advantage of that fact by repurchasing the stock at a hefty discount.
A good investment opportunity usually arises when you can find these four things simultaneously: the ability to benefit from an increasing P/E ratio, the ability to benefit from rising earnings per share, the ability to benefit from stock buybacks, and the ability to receive rising dividends. Aflac is one of the few companies that can check off each of those boxes.
The lowest P/E ratio that Aflac experienced pre-crisis was 16x earnings. Right now, due to the weakness of the yen, the stock is trading at an artificial low of 10x earnings. This sets investors up for a 60% appreciation somewhere down the line-I can tell you what Mr. Market will do, I just can't tell you when he'll do it.
The second and third things are growing earnings and buybacks. The management team at Aflac has told investors to expect profit growth in the neighborhood of 7% annually. When you combine that with the company's plans to retire 3.5% of the outstanding stock each year that appears to be a recipe for 10.5% annual earnings per share growth.
And lastly, there is the question of growing dividends. Aflac's dividend has quadrupled in the past decade. Way back in 2004, Aflac was paying out $0.095 quarterly. Now, Aflac is paying $0.37 each quarter. It's been raising its dividend for three decades (actually, thirty-one years now) and despite the trouble with the weakening yen, Aflac has still been able to pass on to shareholders dividend growth in the range of 6-8% these past few years. When the yen strengthens, it would not be surprising to see shareholders experience a couple of years of double-digit dividend growth rates as compensation for enduring the leaner years.
The weak yen has been a problem for Aflac; that's why the dividend growth and earnings per share growth has slowed down these past few years. But management is acting intelligently to the situation that has presented itself; they created an authorization to take 12.2% of the shares off the market, which seems quite intelligent given its low valuation. When you factor in the company's long track record of dividend growth and management's guidance for 7% annual growth, as well as the ability of shareholders to benefit from an expanding P/E ratio, Aflac shareholders ought to at least be worth a look for your portfolio.