Company Description: Aflac Incorporated provides supplemental health and life insurance in the U.S. and Japan. Products are marketed at worksites and help fill gaps in primary insurance coverage. Approximately 75% of revenues comes from Japan and 25% from the U.S.
Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:
Avg. High Yield Price
20-Year DCF Price
Avg. P/E Price
AFL is trading at a discount to only 3.) above. The stock is trading at a 31.4% premium to its calculated fair value of $43.46. AFL did not earn any Stars in this section.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
Free Cash Flow Payout
Debt To Total Capital
Dividend Growth Rate
Years of Div. Growth
Rolling 4-yr Div. > 15%
AFL earned three Stars in this section for 1.), 2.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. AFL earned a Star for having an acceptable score in at least two of the four Key Metrics measured. Rolling 4-yr Div. > 15% means that dividends grew on average in excess of 15% for each consecutive 4 year period over the last 10 years (2000-2003, 2001-2004, 2002-2005, etc.) I consider this a key metric since dividends will double every 5 years if they grow by 15%. The company has paid a cash dividend to shareholders every year since 1973 and has increased its dividend payments for 28 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
NPV MMA Diff.
Years to > MMA
AFL earned a Star in this section for its NPV MMA Diff. of the $2,621. This amount is in excess of the $700 target I look for in a stock that has increased dividends as long as AFL has. If AFL grows its dividend at 15.0% per year, it will take 5 years to equal a MMA yielding an estimated 20-year average rate of 3.4%.
Memberships and Peers: AFL is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index. The company’s peer group includes: Delphi Financial Group, Inc. (DFG) with a 1.5% yield, Unum Group (UNM) with a 1.5% yield and CNO Financial Group (CNO) with a 0.0% yield.
Conclusion: AFL did not earn any Stars in the Fair Value section, earned three Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of four Stars. This quantitatively ranks AFL as a 4 Star-Buy.
Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $93.51 before AFL’s NPV MMA Differential decreased to the $700 minimum that I look for in a stock with 28 years of consecutive dividend increases. At that price the stock would yield 1.22%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $700 NPV MMA Differential, the calculated rate is 10.5%. This dividend growth rate is below the 16.7% used in this analysis, thus providing a margin of safety. AFL has a risk rating of 1.50 which classifies it as a low risk stock.
Operating in the the U.S. and Japan, two largest insurance markets in the world, AFL has built a tremendous low-cost distribution system. Concerns about AFLs investment portfolio, which holds European bank hybrid bonds and European sovereign debt, have eased. However, deregulation in Japan has allowed more able competitors to enter Aflac’s key markets and a prolonged period of low interest rates dampen the company’s prospects. AFL’s is trading 31% above my fair value buy price of $43.46. It valuation, low yield and willingness to hold its dividend flat, as it did from Feb. 2009 to August 2010, will keep shares of this stock out of my portfolio. For additional information, including the stock’s dividend history, please refer to its data page.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I held no position in AFL (0.0% of my Income Portfolio). See a list of all my income holdings here.
This article originally appeared on The DIV-Net December 27, 2010.