Company Description: Aflac (NYSE:AFL) offers supplemental health insurance and life insurance in the two largest insurance markets in the world, the U.S. and Japan. In addition to its cancer policies, the company has broadened its product offerings to include accident, disability, and long-term care insurance. It markets its products through independent distributors, selling most of its policies directly to consumers at their places of work.
Dividend Reliability A stock's dividend reliability is determined by its dividend payment history as well as its current financial health. Total of four points available.
1. The number of Consecutive Dividend Payments - The longer a company has been paying a dividend, the more ingrained the dividend payment is part of the company culture and the less likely it would be removed. (10 to 25 Years = 1 Point More than 25* Years = 2 Points)
- AFL has paid a regular dividend since 1984. 2 Points
2. Cash Flow Payout Ratio - The percentage of free cash flow that is paid out as dividends. (Less than 60% = 1 Point)
- Cash flow payout ratio = 6%. 1 Point
3. Debt to Total Capital - Too much debt can hinder dividend growth as cash is going to debt and interest payments. Total capital is a combination of debt and shareholders equity. (Less than 45 % = 1 Point)
- Debt to total capital = 21%. 1 Point
Dividend Growth A stock needs to be growing its dividend on an annual basis. The growth of its dividend should be at a respectable rate, especially if the current yield is low. Total of four points available.
4. Number of Consecutive Dividend Increases - The longer a company has been consistently raising a dividend, the more ingrained the dividend increase is part of the company culture and the less likely it would be changed. (10 to 25 Years = 1 Point More than 25* Years = 2 Points)
- AFL has raised its dividend for 28 years. 2 Points
5. 1-Year Cash Flow Payout Ratio <= Avg 5 Year - A cash flow payout ratio that is going up tells us that dividend payments are eating into the company's bottom line. This could signify a slowdown in dividend growth in the future or a slowdown in the company's earnings. Ideally we'd like the ratio to be less than or equal to the average 5-year payout ratio. (1-year cash flow ratio <= Avg 5 year = 1 Point)
- [1 Year = 6%] < [Avg 5 Year = 8%] 1 Point
6. 1-Year Dividend Growth Rate > Avg 5 Year - If the 1-year dividend growth rate is higher than the average 5 year, then we know the dividend growth is accelerating. (1- year dividend growth rate > Avg 5 year = 1 Point)
- [1 Year Growth = 10%] < [Avg 5 Year = 12%] 0 Points
Fair Value If we're going to buy a stock, we don't want to purchase it went its overvalued. Total of 2 points available
7. Current P/E < Avg 5 Year P/E - If the current P/E (price divided by earnings) is less than its average 5 year P/E, then we are getting the stock cheaper today than in the past. (Current P/E < Avg 5 Year P/E = 1 Point)
- [Current P/E = 12.2 ] < [Avg 5 Year P/E = 14.7] 1 Point
8. PEG < 1.5 - The PEG ratio (Price/Earnings To Growth ratio) is a valuation metric for determining the relative trade-off between the price of a stock, the earnings generated per share (EPS), and the company's expected growth. The lower the ratio the better. (PEG < 1.5 = 1 Point)
- PEG = 0.69 1 Point
Strengths - AFL is the most recognized name in supplemental insurance and has a top notch distribution model. It has achieved high quality hiring of its sales representatives and strong development and training of its reps.
Weaknesses - Reviews can easily be found that speak negatively about various problems consumers have had with AFL. This type of negativity can influence potential future customers. The product base can be expanded beyond the current offerings.
Opportunities - AFL has limited the business to Japan and USA so there is a great deal of potential in global expansion, specifically China and India. Expansion in the product base, as mentioned above, can provide additional growth with the existing customers.
Threats - Drastic healthcare reform could affect AFL's business. Natural disasters like the Japan tsunami can greatly increase claims. Competition could increase, which would likely shrink profit margins.
Conclusion - AFL scored 4 points in dividend reliability, 3 points in dividend growth, and 2 points in fair value for a final score of 9/10 points, which rates it as a very strong dividend growth stock.
AFL's exposure to toxic European debt has kept its share price undervalued for several years. After ridding itself of most of this debt, the Japan tsunami cast another doubt over the company's financial health. It appears that the natural disaster did not have as large of an impact as expected. There is considerable room for dividend growth based on AFL's low cash flow payout ratio and debt to total capital. I feel there are smoother roads ahead for AFL and that will soon be reflected in the share value. I hope to add to my position on AFL and possibly initiate a position in my Roth IRA in the near future.
* Based on my experience using this analysis model I have decided to make a small change to consecutive dividends paid and consecutive dividend raises. Previously I used > 30 years = 2 points but have changed this to > 25 years. This will be reflected from this analysis forward.
Disclosure: I am long AFL.