- Aflac has 31 years of consecutive dividend increases.
- Chubb has 32 years of consecutive dividend increases.
- Both companies have dividend yields over 2%, with payout ratios under 25%.
- Aflac has grown revenue per share at 8.5% over the last decade.
- Chubb is significantly less volatile than Aflac.
Chubb Group (NYSE:CB) and Aflac (NYSE:AFL) are both in the competitive insurance industry. They primarily operate in different insurance categories, although both offer supplemental health insurance in the US.
Chubb Group sells home, car, business and supplemental health insurance through its network of independent brokers and agents. The company operates in North and South America, Australia, Europe and Asia. About 75% of the company's revenue comes from the US, versus just 25% internationally.
Source: Chubb 2013 Annual Report
Aflac is the world's leading cancer insurer. The company sells cancer, health and life insurance policies in Japan and the US. About 75% of Aflac's revenue comes from Japan, versus just 25% from the US.
Source: Aflac 1st Quarter Report
Chubb Group Current Events
Chubb Group operates in several niche insurance markets. The company can underwrite profitable policies by operating in slightly less competitive markets. Chubb's revenue for the first quarter of 2014 breaks down as follows:
· Personal Insurance: 33% of revenue
· Specialty Insurance: 46% of revenue
· Commercial Insurance: 21% of revenue
The company posted 1% revenue growth excluding the impact of foreign currencies. US revenue grew 3%, while international revenue dropped 4% on a constant currency basis. The results of the first quarter and the company's geographic revenue breakdown show that Chubb's domestic competitive position is much more favorable than its international position.
Chubb stands out from other insurance businesses due to its conservative underwriting policies. The company has a combined ratio (expenses and losses divided by premiums) of 93.2% for the first quarter of 2014. Excluding the impact of catastrophes, Chubb's combined ratio would be only 86.6% for the first quarter of 2014. Chubb has maintained a combined ratio under 100% since 2003.
Source: Chubb 2013 Annual Report
Aflac Current Events
Aflac is the dominant provider of cancer insurance in Japan. The company posted a 1.4% increase in premium income in yen for the first quarter of 2014. Aflac's US earnings were adversely impacted by weakness in the Yen. Aflac's US premium income rose 1.1% for the first quarter of 2014, just less than the company's Japanese revenue growth.
Aflac has managed to write extremely profitable policies over the last five years. The company has maintained a pretax profit margin of around 20% for half a decade. The company has actually managed to increase its pretax profit margins over the most recent quarter.
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Source: Aflac 2014 Analyst Meeting Transcript
The downside to Aflac is the company is heavily invested in Japanese bonds. However, viewing Aflac as nothing but a holder of Japanese bonds is not correct. The company's high profit margins, long history of growth and increasing dividends, and dominant market share in Japan's health and cancer insurance market show a company that has a strong competitive advantage.
Both Aflac and Chubb have low P/E ratios. Aflac's P/E is only 9.72, one of the few quality stocks in today's market with a P/E ratio under 10. Chubb has a P/E ratio of 11.03.
The Chubb Corporation
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American International Group, Inc.
The Allstate Corporation
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Hartford Financial Services Group Inc.
Both Chubb and Aflac are significantly cheaper than the S&P 500, which has a P/E ratio of about 19. Much of the insurance industry has not taken part in the excessive valuations the rest of the market exhibits.
Comparison 1: Dividend History
Chubb has increased its dividends for 32 consecutive years. Aflac has increased its dividends for 31 consecutive years. Both business' long history of increasing dividend payments shows these companies have both the ability to grow profitably for long periods of time and shareholder friendly management that will continuously reward shareholders with rising dividends.
Why it matters: The Dividend Aristocrats (stocks with 25-plus years of rising dividends) have outperformed the S&P 500 over the last 10 years by 2.88 percentage points per year. Source: S&P 500 Dividend Aristocrats Factsheet, February 28 2014, page 2
Comparison 2: Dividend Yield
Chubb has a dividend yield of 2.17%, while Aflac has a dividend yield of 2.36%. Both companies have yields slightly higher than the overall stock market.
Out of 120 companies with 25-plus years of dividend payments without a reduction, Chubb has the 73rd highest dividend yield, and Aflac has the 62nd highest. Aflac slightly outranks Chubb based on dividend yield.
Why it matters: Stocks with higher dividend yields have historically outperformed stocks with lower dividend yields. The highest-yielding quintile of stocks outperformed the lowest-yielding quintile by 1.76 percentage points per year from 1928 to 2013.
Source: Dividends: A Review of Historical Returns
Comparison 3: Payout Ratio
Both Aflac and Chubb have exceptionally low payout ratios. Chubb's payout ratio is 21% while Aflac's is 22.20%. Both businesses have the ability to significantly ramp up dividend payments faster than overall company growth if they choose to do so.
Out of 120 companies with 25-plus years of dividend payments without a reduction, these companies have the 12th and 10th lowest payout ratios.
Why it Matters: High-yield, low-payout ratio stocks outperformed high-yield, high-payout ratio stocks by 8.2 percentage points per year from 1990 to 2006. Source: High Yield, Low Payout by Barefoot, Patel, & Yao, page 3
Comparison 4: Growth Rate
Aflac has managed to grow its revenue per share at about 8.5% per year over the last decade. The company has accomplished this through both organic growth and well-timed share repurchases. Chubb has grown revenue per share at 6.65% over the last decade.
Out of 120 companies with 25-plus years of dividend payments without a reduction, Aflac has grown revenue per share the 13th fastest, while Chub has grown revenue per share the 34th fastest. Once again, Aflac outranks Chubb based on growth rate.
Why it matters: Growing dividend stocks have outperformed stocks with unchanging dividends by 2.4 percentage points per year from 1972 to 2013. Source: Rising Dividends Fund, Oppenheimer, page 4
Comparison 5: Volatility
Chubb Group has a long-term standard deviation of about 27%. Aflac has been exceptionally volatile over the last 10 years due to its heavy exposure to Japan and the Yen. Aflac's long-term standard deviation is about 43%.
Out of 120 companies with 25-plus years of dividend payments without a reduction, Chubb has the 56th lowest standard deviation. Aflac has the 114th lowest standard deviation (out of 120). Chubb is significantly less volatile than Aflac.
Why it Matters: The S&P Low Volatility index outperformed the S&P 500 by 2 percentage points per year for the 20-year period ending September 30th, 2011. Source: Low & Slow Could Win the Race, page 3
Both Aflac and Chubb have dividend yields just north of 2% and payout ratios under 25%. Both businesses have a long history of profitable growth in the insurance industry. Aflac has managed to grow revenue per share about 2 percentage points a year faster than Chubb over the last 10 years.
Aflac's heavy exposure to Japan and the Yen have made it exceptionally volatile. Because of Aflac's high volatility, Chubb outranks Aflac based on the 8 Rules of Dividend Investing. Chubb is ranked in the top 10, while Aflac is ranked 28th (which is still high). Investors who are looking for stability, capital appreciation and income appreciation will most likely be better served by Chubb than Aflac going forward. Both businesses are strong investments however, and Aflac will most likely do well for investors who can hang on through its high volatility.