Aflac Looks and Quacks Like a Great Dividend Stock

Today’s search for candidates for our portfolio of superior dividend stocks continues with a look at Aflac Incorporated (NYSE: AFL).

Company Profile:

From Yahoo Finance

Aflac Incorporated, through its subsidiaries, engages in the marketing and sale of supplemental health and life insurance plans in the United States and Japan. It sells cancer plans, care plans, general medical indemnity plans, medical/sickness riders, living benefit life plans, ordinary life insurance plans, and annuities in Japan. The company also sells cancer plans and various types of health insurance, including accident/disability, fixed-benefit dental, sickness and hospital indemnity, vision care, hospital intensive care, long-term care, ordinary life, and short-term disability plans in the United States.

Market capitalization is $25.96B.

Company Fundamentals:

Management has delivered a solid return on invested capital with a 5 year average ROIC of 13.40%. Last year’s ROIC improved to 15.18%.

Return on equity had been extremely steady for the first 7 years of our 10 year period at around 12%. However, since 2004, the ROE has been improving to the tune of 15.23%, 18.13% and 17.42% respectively. The 10 year average ROE is 13.84% and the 5 year average improves to 14.98%. I definitely like to see the ROE either holding steady or trending upwards.

The equity growth rate has been trending downwards. The 9 year average rate is 12.41%. The 5 year rate drops to 9.94%. The 3 year rate drops further to 8.77% and last year’s equity growth rate was 6.58%.

Earnings per share growth rate has not followed the same trend as the equity growth rate. In fact, it trends upward - almost. The 9 year rate is 17.37%. The 5 year rate increases to 20.21%. The 3 year rate is even better at 24.84%. But unfortunately, last year’s EPS growth rate slowed to a mere 2.43%.

Sales growth rates had remained incredibly steady over the years with the 9 year, 5 year, and 3 year rates in the 8% to 10% range. Unfortunately, last year’s sales growth rate dropped to 1.76%.

While the ROE has been improving, the growth rates have been trending downwards.

Dividend Fundamentals:

The current dividend yield is 1.54%. I would argue that is below average since the dividend yield on the S&P 500 Index is 2.03% and 2.57% on the DJIA.

Now, the yield may be below average, but the dividend growth rate has been superb. The 9 year dividend growth rate is 19.90%. The 5 year rate improves to 23.7%. And last year’s dividend growth rate was a stunning 25%. Fantastic growth. Remember that a 15% increases means that your dividend doubles every 5 years.

And another great sign is that the dividend payout ratio is very low. It has gone from 16.69% in 1997 to 18.64% in 2006. This gives management ample room to maneuver and maintain their aggressive dividend growth rates.

Cash flow growth rates had been trending upwards until 2006. The 9 year rate is 16.37% and the 5 year rate is 19.3%. Unfortunately, last year’s rate was a mere 2.56%.

This is definitely a stunning dividend grower!

Valuation Models:

Let’s use our 3 methods to value a dividend yielding stock to determine a model price.

With a low dividend yield of 1.54%, you would expect this to be on the historical low side. In fact, it is on the high side. The 5 year average high dividend yield is only 1.15%. So, if as investors, we demand the average high dividend yield, then the model price is $ 71.30. That means that Mr. Market has under priced this stock by 25.50%! That is a very large discount.

However, Mr. Graham would not agree. The Graham number is $34.26. At the current price of $53.12, that would be a 55% premium.

For the discounted present value method, I used the following inputs:

future EPS growth rate of 9.94% (this is determined from the 5 year equity growth rate. Analysts have forecast 14.8%. However, I will use my more conservative value.)

future P/E of 17.25 (current P/E and is at a historical low)

dividend yield of 1.54%

future dividend growth rate of 21.71% ( the 3 year average dividend growth rate)

With these inputs, the model price works out to $45.18 which represents a premium of 17.57%.

See my ALF calculations.

Here is the 1 year stock price chart:

click to enlarge
AFL 1-year chart

As you can see, Aflac has had an excellent run since March and has not been too badly affected by the recent downturn.

Conclusion:

Although the company fundamentals have been trending downwards, the incredibly low dividend payout ratio coupled with the fantastic dividend growth makes this a worthy addition to our portfolio of superior dividend yielding stocks!

If it looks like a duck and quacks like a duck, it must a great dividend stock!

Full Disclosure: I do not own shares in AFL.