AFLAC (AFL), one of my favorite stocks, was down sharply yesterday due to a lower forecast from the company. Dan Amos, the CEO, told a dinner audience earlier this week that the company is expecting to grow its earnings by 0% to 5% next year.
Let’s remember that the company said it expects to earn between $6.09 and $6.34 per share for this year. Wall Street’s consensus for 2011 is currently $6.22 but I think $6.30 is probably more accurate. At 0% to 5%, that implies 2012 earnings of $6.30 to $6.61 per share. Wall Street had been expecting $6.64 per share.
Market Watch noted these comments from Randy Binner at FBR Capital Markets:
“While we believe the guidance may be overly conservative and there were positive comments on 2Q11 sales growth and de-risking activities, we believe Aflac shares trade based on EPS,” Binner wrote in a note to investors Wednesday. “As such, we would expect shares to adjust to the lower EPS outlook.”
I agree that this forecast is overly conservative. This would be the slowest growth in AFLAC’s history. Ultimately, it may hit Wall Street’s forecast (which will soon be lowered) of $6.64 per share.
Still, 2012 is a long way away and AFLAC is sticking with its growth forecast for 2011. AFLAC has set the bar low and now it’s up to the company to surpass it.
The important news is that AFLAC is working to “de-risk” its portfolio:
Insurer Aflac Inc. said it will incur a loss of about $31 million before taxes in the second quarter as it sells off some investments that had been flagged as problematic by analysts and investors.
The largest loss, of $72 million, is tied to the sale of holdings in Irish Life and Permanent Group Holdings PLC (ILPMF.PK), according to a regulatory filing Tuesday. The company also sold off sovereign debt from Tunisia at a pre-tax loss of $5 million.
Those losses were offset by gains of $18 million from the sale of perpetual securities issued by Lloyds Banking Group PLC (LYDBF.PK) and $28 million of perpetual securities from Royal Bank of Scotland Group PLC (RBS).
The asset sales are part of Aflac’s ongoing effort to unload some of its sovereign and bank debt from financially stressed regions, and reduce the size of the largest positions in its investment portfolio. The company sold off Greek debt in the first quarter.
Such investments have made some investors and analysts nervous in recent years, first amid the 2008 financial crisis and later when the European Union grappled with the mounting debts of Greece and other member nations last year.
AFLAC has said that it’s looking to increase its dividend by 1% to 10% this year and next year. Plus, the company projects repurchasing 3-12 million shares this year and 0-12 million next year.
The yen’s impact on 2011′s operating earnings is pretty straightforward. At an exchange rate of 87.69 yen per dollar, the earnings will grow by 8% to $5.97 per share for 2011. Every one point below that adds roughly five cents per share to AFL’s bottom line. Currently, the exchange rate is 81.4 ... so that’s good for us.
There’s no reason to sell AFLAC based on this news. The company is still fundamentally sound. It's merely preparing itself for what may be a more difficult environment.
Disclosure: AFL is on my Buy list.