Company Description (Source: SEC 10-K)
AFLAC Inc (NYSE:AFL) sells health and life insurance, through its subsidiary, American Family Life Assurance Company of Columbus (Aflac), which operates in the United States (Aflac U.S.) and as a branch in Japan (Aflac Japan). Aflac's business consists of two segments: Aflac Japan and Aflac U.S. Aflac Japan sells voluntary supplemental insurance products, including cancer plans, general medical indemnity plans, medical/sickness riders, care plans, living benefit life plans, ordinary life insurance plans and annuities. Aflac U.S. sells voluntary supplemental insurance products, including loss-of-income products (life and short-term disability plans) and products designed to protect individuals from depletion of assets (hospital indemnity, fixed-benefit dental and vision care).
AFLAC is a dividend aristocrat with 29 consecutive years of increasing dividends.
Vital Statistics (Source: Google Finance)
- Recent Price: $48.01 (as of 02/21/2012)
- 52-Week Range: $31.25 - $59.54
- Market Capitalization: $22.39 Billion
- P/E Ratio: 11.46
- EPS: $4.19
- Yield: 2.75%
A 10-year summary of Sales, Earnings Before Interest and Tax (EBIT), Earnings per share (EPS), yearly high and low stock price, corresponding high and low P/E (calculated by dividing the high and low price by the EPS for the year), and average P/E (average of high and low P/E) is shown below.
Key 10-year data for AFLAC
Year | Sales (in Billions) | EBIT (in Billions) | EPS | High Price | Low Price | High P/E | Low P/E | Average P/E |
2011 | 22.17 | 2.99 | 4.18 | 59.5 | 31.3 | 14.2 | 7.5 | 10.9 |
2010 | 20.73 | 3.59 | 4.95 | 57.8 | 41.3 | 11.7 | 8.3 | 10.0 |
2009 | 18.25 | 2.24 | 3.19 | 46.3 | 13.4 | 14.5 | 4.2 | 9.4 |
2008 | 16.55 | 1.91 | 2.62 | 67.9 | 33.7 | 25.9 | 12.9 | 19.4 |
2007 | 15.39 | 2.5 | 3.31 | 62.7 | 45.8 | 18.9 | 13.8 | 16.4 |
2006 | 14.62 | 2.26 | 2.96 | 48.7 | 43.2 | 16.5 | 14.6 | 15.5 |
2005 | 14.36 | 2.23 | 2.92 | 49.3 | 35.7 | 16.9 | 12.2 | 14.6 |
2004 | 13.28 | 1.77 | 2.45 | 42.2 | 35 | 17.2 | 14.3 | 15.8 |
2003 | 11.45 | 1.2 | 1.47 | 36.5 | 30.3 | 24.8 | 20.6 | 22.7 |
2002 | 10.26 | 1.26 | 1.55 | 32.4 | 23.9 | 20.9 | 15.4 | 18.2 |
From these data, we can plot Sales, EBIT, and EPS versus Year, as shown in the chart below.
Sales (in Billions), EBIT (in Billions), and EPS versus Year for AFLAC, 2002-2011
As evident from the chart above, AFL has demonstrated reasonable predictable sales and earnings over the past 10 years, albeit with some cyclical tendencies typical of financial companies, with earnings falling during the recessions of 2002 and 2008. The relatively predictable earnings allows us to project EPS in the near future, say in five years (i.e. Year 2016), using the logarithmic regression equation for EPS = 3.656E-98 * exp(0.1123*2016) = 7.6893. This projection assumes 11 percent annual EPS growth.
A conservative average P/E estimate for the stock can be obtained as follows:
Signature P/E: A well established stock has a signature P/E, an average P/E it commands in the market based on its business. We calculate this by averaging the Average P/E over the past 10 years, excluding any outliers (data points that fall significantly beyond the other data points). There are no significant outliers, so we average the Average P/Es from the past 10 years to arrive at a signature P/E of 15.3.
High P/E estimate: a conservative high P/E estimate can be calculated by averaging the five lowest High P/Es of the 10 High P/Es from the past 10 years. Averaging the 5 lowest High P/Es from the past 10 years gives 14.8.
Low P/E estimate: a conservative low P/E estimate can be calculated by averaging the five lowest Low P/Es of the 10 High P/Es from the past 10 years. Averaging the 5 lowest Low P/Es from the past 10 years gives 9.
Average P/E estimate: this takes the average of the High P/E estimate and the Low P/E estimate, as calculated above, to give a conservative estimate of an average P/E for the stock we can expect. Averaging 14.8 and 9 gives us 11.89.
Target Price
Multiplying our EPS projection for 5 years hence by the average P/E estimate gives us a projected average price for the stock: $7.6893 * 11.89 = $91.41, which represents an annual stock price return of 17.5 percent from the current price = $48.01. When we add in the 2.7 percent dividend yield, the total return expected is 20.2 percent a year, which means an investment in AFL today is expected to double in about 4 years.
Given a beta = 1.85 for AFL, a risk-free rate = 2% (using the yield on 10-year Treasury bond as a benchmark), and estimated risk premium of about 7 percent for the general stock market, we have a discount rate = 2% + 1.85*(7%) = 14.95%. Applying this discount rate of 14.95%, our projected price of $91.41 in 5 years translates to a target price = $45.55 in today's dollars. This is about 5% below from the current price of $48.01, suggesting the stock is fairly valued right now. For a good margin of safety, investors are well advised to buy only if the current price is at least 20% below the target price, which means a buy price = $36.44.
Current P/E Compared with Signature P/E
The stock's current P/E should be compared with its signature P/E, since established stocks tend to revert back to their respective signature P/Es over the long term. The current EPS = 4.19, giving us a current P/E = 11.46. This is about 75% of the stock's signature P/E of 16, suggesting the stock is undervalued right now. To provide some margin for error, we should look to buy when the current P/E is 80% or less of the stock's signature P/E, so AFLAC is currently attractively priced relative to its historic P/E.
AFLAC's P/E Compared with Competitors' P/Es
AFLAC competes mainly with privately held companies like Asahi Mutual Life Insurance Company and Nippon Life Insurance Company in Japan and American Fidelity Assurance Company in the U.S. Current P/E and Forward P/E for the company and its publicly listed competitors are tabulated below.
Stock | Current P/E | Forward P/E |
AFLAC (AFL) | 11.46 | 6.77 |
American Independence (NASDAQ:AMIC) | 18.04 | NA |
CNO Financial Group (NYSE:CNO) | 4.54 | 10.35 |
PartnerRe (NYSE:PRE) | NA | 8.65 |
Principal Financial Group (NYSE:PFG) | 12.74 | 7.7 |
Reinsurance Group of America (NYSE:RGA) | 7.08 | 7.52 |
StanCorp Financial Group (NYSE:SFG) | 12.73 | 8.81 |
Triple-S Management (NYSE:GTS) | 11.89 | 9.41 |
Unum Group (NYSE:UNM) | 8.07 | 6.63 |
Mean | 10.82 | 8.59 |
Median | 11.68 | 8.65 |
Source: MSN Money
Comparing both current and forward P/E, AFLAC is selling at a discount. Only Unum Group offers better valuations in both current and forward P/E, but Unum is a significantly lower quality stock, with earnings deficits in 2003 and 2004, and lower margins and returns on equity.
Historically, for the past 10 years, AFLAC has outperformed all its competitors (10-year price data is unavailable for CNO, RGA, or GTS). It has also outperformed the S&P 500 (of which AFLAC is a part).
Risk Index
Lastly, we calculate the Risk Index, calculated as (Current Price - Forecast Low Price)/ (Potential High Price - Forecast Low Price) to give an estimate of the risk: reward ratio. Risk index less than 20% is desired, which gives us +200% potential returns for every risk of 50% loss we assume.
The Forecast Low Price is calculated by multiplying the Low P/E estimate by the Forecast Low EPS, to give a conservative estimate of low price for the stock in 5 years, assuming zero EPS growth and low valuation. Forecast Low EPS is estimated by averaging the EPS over the past 5 years. For growth stocks with predictable earnings growth, EPS in 5 years should not be any lower than this conservative estimate. For AFL, the forecast low EPS is equal to 3.65, so the Forecast Low Price = 9 * 3.65 = $32.94.
The Potential High Price is calculated by multiplying the High P/E estimate by the projected EPS in 5 years, giving us a price AFLAC in 5 years should the stock command a high P/E. For AFL, this equals 14.8 * 7.6893 = $113.44.
Thus, the Risk Index = ($48.01 - $32.94) / ($113.44 - $32.94) = 19%. Since this is below 20%, the stock has a favorable reward to risk ratio at the current price.
Conclusion
AFLAC Inc, currently selling around $48.01, has a target price = $45.55. While the stock, with a current P/E of 11.46, is attractively priced compared to its historic P/E and P/Es of its competitors, the current price does not offer adequate margin of safety. Therefore, I rate the stock a HOLD at the current price. AFLAC is a solid stock for long-term holding; a pullback to $36 would provide an excellent buying opportunity.
Disclosure: I am long AFL.
Disclaimer: Use this information as a starting point for your own due diligence, before buying any stock. If you do buy, be sure to read any annual reports (10-K) and quarterly reports (10-Q) to ensure that the fundamentals remain good and the stock is on target to reach its projected price. After holding for five years, repeat the analysis detailed in the article to decide whether to continue to hold, add, or reduce your position.