Aflac: Follow This Dividend Duck

| About: Aflac Incorporated (AFL)

Aflac (NYSE:AFL), which stands for American Family Life Assurance Company of Columbus, provides supplemental health and life insurance in the USA and Japan. The company offers various voluntary supplemental insurance products, including cancer plans, general medical indemnity plans, and other such plans and products. The company, founded in 1955 and headquartered in Georgia, sells its products through sales associates and brokers, independent corporate agencies, individual agencies, and affiliated corporate agencies.

This article will present you with some reasons why Aflac (frequently represented by a duck) is a great buy at the moment even after its rapid price appreciation so far in 2012. But first, here is a snapshot of Aflac's key numbers:

Price (10.12.2012) $54.09
Market Cap 25.36B
Income (Trailing 12-mths) 2.83B (P/E: 8.96)
Sales (Trailing 12-mths) 24.97B (P/S: 1.02)
Book Value Per Share (BVPS) $34.10 (P/B: 1.59)
Debt/Equity Ratio 0.28
EPS Growth Past 5 Years 7.20%
EPS Growth Next 5 Years (est.) 10.80%
Dividend $1.40 (2.59%)
Payout Ratio 21.83%

1. Creating Shareholder Value

-Fairly High And Consistently Increasing Dividend

Firstly, Aflac pays a fairly high and consistently increasing dividend. At the moment, this dividend of $1.40 equates to a yield of 2.59% based on the stock's closing price on 11.12.2012, which is acceptable for an income generating stock and is generally higher than most stocks in the S&P 500 and Dow. The best part is, this dividend had been increased for 30 consecutive years (since 1982), and that it has grown from $0.30 in 2003 to a significantly higher $1.40 today. This equates to a 13.9% 10-year dividend growth, which obviously outpaces inflation. Although I do not expect the company to grow its dividends this fast any more, I expect the future growth rate to be in the neighborhood of its 3-year growth rate - around 8%.

This dividend is also extremely sustainable, and has a lot of space for growth in the future, as Aflac only has a 21.83% payout ratio. My payout ratio limit, besides exceptions for certain capital-intensive stocks, is around 85%. The table below shows Aflac's dividend payments over the past 10 years.

Year Dividend ($)
2003 0.30
2004 0.38
2005 0.44
2006 0.55
2007 0.80
2008 0.96
2009 1.12
2010 1.14
2011 1.23
2012 1.30

In addition, Aflac's dividend increase through the 2008-2009 recession also shows its resiliency to recessions. Aflac was actually increasing dividends, while companies like Bank of America (NYSE:BAC) and State Street (NYSE:STT), previously dividend aristocrats, lowered their dividends

-Company Buying Back Shares

Besides paying shareholders dividends, the company has also been returning shareholder value in another, more intangible way - buying back shares. The company's total shares outstanding number has been dropping over the past 10 years, from 514.44M in 2002 to 466.31M in 2011. Although it had diluted shares once in a while, it is obvious that the figure's general trend is down. Shareholders do not own the whole company, therefore, share buybacks bode well for shareholders as they are able to own a bigger part of the company without increasing the number of shares they own. The table below shows Aflac's shares outstanding number over the past 10 years.

Year Shares outstanding (Millions)
2002 514.44
2003 509.89
2004 506.61
2005 498.90
2006 492.55
2007 486.53
2008 466.62
2009 468.57
2010 469.66
2011 466.31

2. Established A Strong Brand Name In Japan

Quite evidently, Aflac has established an extremely strong brand name in Japan, being the number one insurance company in terms of individual insurance policies in force in Japan, insuring approximately one out of every four Japanese households. Besides this, according to the company's 10-K financial statements over the past few years, its revenue portion from Aflac Japan has increased steadily over the years, as shown in the table below. Aflac Japan only accounted for 71% of total revenues in 2007, and as of fiscal 2011, 83% of total revenues are from Japan.

Year Portion of Revenues (Aflac Japan)
2007 71%
2008 72%
2009 73%
2010 77%
2011 83%

One may think that this increase could be due to lower overall earnings without looking at the numbers, but according to Aflac's revenue numbers over the last 5 years as shown below, this is not the case.

Year Revenue (Billions, $)
2007 15.39
2008 16.55
2009 18.25
2010 20.73
2011 22.17

3. Attractive Valuation

P/E Forward P/E P/B P/S P/FCF
8.87 7.72 1.57 1.01 1.77

Even after Aflac's big run up of 27.84% YTD over the past year (shown in the chart above), Aflac still looks like a good buy according to its valuation. Trading at around 8.9X trailing 12-month earnings, 7.8X forward earnings and 1.8X Free Cash Flow, it still makes good sense to pick up some shares in the company. In addition, it is also extremely cheaply priced as compared to its past valuations, with an average P/E of 17.33 over the past 10 years, as shown in the table below. (Also note that the lowest P/E value Aflac had was 6.8 in 2009, which is not all that far from its valuation today.)

Date P/E
Dec 31st, 2002 19.43
Dec 31st, 2003 24.61
Dec 31st, 2004 16.26
Dec 31st, 2005 15.90
Dec 31st, 2006 15.59
Dec 31st, 2007 18.92
Dec 31st, 2008 17.50
Dec 31st, 2009 14.50
Dec 31st, 2010 11.33
Dec 31st, 2011 10.35
Dec 11th, 2012 (today) 8.96
Average 10-yrs 17.33

-Basic Calculations Using Historical P/E Ratio And EPS

Aflac has a 2013 EPS estimate of $6.91 and an estimated EPS growth rate of 10.8% over the next five years. Taking a more conservative 8.5% growth rate, Aflac will have an EPS number of $9.62 in 2017, after five years.

Year EPS ($)
2013 6.94
2014 7.53
2015 8.17
2016 8.86
2017 9.62

Assuming that the stock's price reverts to a P/E of 15 (again, fairly conservative) in 2017, the company's stock will be worth $144.30 per share, which equates to a 21.7% growth in capital over the next five years (if one buys today), which is an exceptionally great return. In addition, all the dividends shareholders will get over the next 5 years will only add more color to the fabulous capital return shareholders will receive.

4. Strong Balance Sheet

Here is Aflac's balance sheet on MSN Money.

Lastly, Aflac also has a strong balance sheet. The company's assets had increased a whopping 78% from fiscal 2007 to fiscal 2011, from $65.81B to $117.1B. This was mainly because of the growth in its portfolio of investments, which is one that is extremely stable and has a good yield. Another article had already gone in-depth about the company's portfolio, so I will not go much into it here.

In addition, the company's cash and cash equivalents have increased from $1.56B in 2007 to $2.25B in 2012. This is a great increase of 44% over 5 years. Besides this, the company has always accumulated cash and does not use it irrationally. The company's cash numbers have always been maintained stable, around $1B-$2B over the past 5 years. This has proved useful when it needed the cash for the 2008 recession, But even then, it had $941M in cash, which is why it could continue paying its dividends to shareholders and why its operations could go on as normal.

Aflac also does not have any preferred stock, which is a good sign for the company - it does need to pay extra special dividends which would only drain its cash reserves faster. A company which has preferred stock also shows how cash-strapped it is to have to borrow money from its shareholders, technically, at higher interests than normal (special dividends, etc.).

Key Risks And Flaws

Regardless of how many merits a company has, it is bound to have some flaws. Here, I list some of Aflac's flaws.

1. Happenings In Japan Could Affect Revenues

One significant risk that Aflac may face from operating in Japan is an exchange rate risk. As of 2011, Aflac had gotten 83% of revenue from Japan, but Aflac's revenue and profit numbers will ultimately be converted to US Dollars. Therefore, if there is a sudden or prolonged weakness in the Japanese currency, Aflac's income numbers and growth figures will be impacted significantly.

Besides this, Japan is a country that is lying on the "ring of fire" geographically (as shown below), and is subject to many natural disasters, such as earthquakes, tsunamis and other such disasters. This has already resulted in higher benefits and claims by the victims in recent years, including a devastating tsunami and earthquake that happened last year. The disasters have already burdened Aflac and are likely to do so even more going forward, as all these natural disasters get more frequent and more severe.

2. Downgrades In Debt Ratings

Recently, Aflac had also seen a few downgrades in its debt ratings recently. Following a downgrade in Aflac's issuer default rating in 2010 from A+ to A with a negative outlook, Aflac saw another downgrade by Moody's, this time on its senior debt. The downgrade was from A2 to A3, as shown here, based on European exposure and limited diversification in its portfolio. This might possibly mean more risk and losses in the company's portfolio, and adversely impact its financial situation.

3. Near Its 52-week High

This is not a serious flaw, and is not one that long-term investors should pay much attention to, but the stock is currently trading extremely near its 52-week high. As of its closing of $54.09 on 11.12.2012, it is about half a dollar away from this high. My point is, I do not advise new investors considering to take an investment in the company to invest now. Stocks fluctuate, so a better buying price could be gotten if one waits a while more. As shown in the Aflac 5-year chart (with 50 and 200-day SMA) below, a more rational long-term buying price would be between $45 and $50.

The Takeaway

Aflac is one of the best long-term top-quality picks in the market at the moment, and its dirt-cheap valuation at the moment makes the stock look even better. In addition, with a fairly high and steadily growing 2.6% dividend to help, this dividend duck looks like a suitable long-term pick for any investor's portfolio.

All the information/figures mentioned in this article were sourced from Aflac's 10-K filings, Aflac's website, MSN Money, Finviz, YCharts, and Yahoo! Finance. All prices mentioned are based on the 11 December 2012 closing price.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AFL over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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