Large Cap Dividend Portfolio That Can Outperform By A Big Margin

| About: Aflac Incorporated (AFL)


Creating a dividend stock portfolio that can outperform the market by a big margin, according to the method of the well-known investor Joel Greenblatt.

15-years back-testing of the portfolio’s method has given an average annual return of 18.09%.

Description and a buy recommendation for the first-ranked stock of the system, Aflac Inc.

In order to create a dividend stock portfolio that can outperform the market by a big margin, I have used the method recommended by the well-known investor Joel Greenblatt, with a small change. While Mr. Greenblatt in his book "The Little Book That Beats the Market" did not place a demand for a dividend payment, I have put a demand for at least 1% yield for all the companies in the portfolio.

Mr. Greenblatt proposed what he called "the magic formula" to rank all the stocks according to just two factors; Return on Capital and Earnings Yield (E/P) in equal proportions, and to select the first twenty to thirty stocks for the portfolio. Back-testing has proved that this ranking system is one of the best freely available ranking methods. For this portfolio, I have searched only for companies that are included in the Russell 1000 Index. The Russell 1000 Index measures the performance of the large-cap segment of the U.S. equity universe.

I used the Portfolio123's powerful screener to perform the search and to run back-tests. Nonetheless, the screening method should only serve as a basis for further research. All the data for this article were taken from Yahoo Finance, Portfolio123 and

After running this screen on May 11, 2014, I discovered the following twenty stocks:

The table below presents the trailing P/E, the return on equity, the dividend yield, and the payout ratio, for the twenty companies.

Aflac Inc. (NYSE:AFL)

The Company

Aflac Incorporated provides supplemental health and life insurance products. It operates through two segments, Aflac Japan and Aflac U.S. The company offers various 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 in Japan.

Major Developments

Aflac's main business is in Japan; in 2013, and in the first-quarter of 2014, Aflac Japan accounted for 75% of total revenues, compared to 77% in 2012. At December 31, 2013, Aflac Japan accounted for more than 86% of total company assets, down slightly from 87% a year earlier. Aflac Japan's growth rates in dollar terms for the first quarter were suppressed as a result of the weaker yen/dollar exchange rate.

The average yen/dollar exchange rate in the first quarter of 2014 was 102.70, or 9.8% weaker than the average rate of 92.59 in the first quarter of 2013. Aflac Japan's yen-denominated income statement is translated from yen into dollars using an average exchange rate for the reporting period, and the balance sheet is translated using the exchange rate at the end of the period. However, except for certain transactions that include the Aflac Japan dollar investment program, the company does not actually convert yen into dollars. As a result, Aflac views foreign currency as a financial reporting issue and not as an economic event for the company or its shareholders.

Since yields on yen-denominated debt remain near record lows, Aflac has been shifting some Japanese investments to U.S. bonds.

In an effort to boost shareholder confidence, Aflac announced in November 2013, a new share repurchase program for 40 million shares, to commence with immediate effect. Under its prior authorization, Aflac bought back about 308,000 shares worth $18.5 million during the third quarter of 2013. Overall, the company repurchased $298 million worth of shares in the first three quarters of 2013.

Valuation Metrics

The table below presents the valuation metrics of AFL, the data were taken from Yahoo Finance and

Aflac valuation metrics are good; the trailing P/E is very low at 9.76, the forward P/E is also very low at 9.62, and the enterprise value-to-EBITDA ratio is extremely low at 7.36.

Latest Quarter Results

On April 29, Aflac reported its first-quarter 2014 financial results, which beat EPS expectations by $0.11 (7%). Reflecting the weaker yen/dollar exchange rate, total revenues fell 9.1% to $5.6 billion during the first quarter of 2014, compared with $6.2 billion in the first quarter of 2013. Net earnings were $732 million, or $1.60 per diluted share, compared with $892 million, or $1.90 per share, a year ago.

In the report, Chairman and Chief Executive Officer Daniel P. Amos commented on the company's first quarter results and offered an outlook for the year:

We are pleased with our overall financial results in the first quarter of 2014. Aflac Japan, our largest earnings contributor, generated strong financial results for the quarter. As we anticipated, Aflac Japan's total new annualized premium sales in the first quarter were down significantly following difficult comparisons to the prior year when first sector sales increased dramatically ahead of a premium rate increase in April 2013 that was prompted by declines in interest rates. While Aflac Japan's third sector product sales were lower than expected, we remain encouraged by the long-term sales growth potential as we continue to expand and enhance our distribution channels. As such, we continue to expect that Aflac Japan's sales of third sector products will increase 2% to 7% for the year.


Aflac has increased its annual dividend for 29 consecutive years. The forward annual dividend yield is at 2.35%, and the payout ratio is only 21.3%. The annual rate of dividend growth over the past three years was at 7.6%, over the past five years was at 8.1%, and over the past ten years was very high at 16.8%. I consider that besides dividend yield, the consistency and the rate of raising dividend payments are the most crucial factors for dividend-seeking investors, and AFL's performance has been impressive in this respect.

Source: Charles Schwab

Technical Analysis

Personally, I am using only fundamental analysis for my investment decisions. After many years of experience, and after having tried all kinds of decision-making, including technical analysis, I have reached the conclusion that relying on fundamental information is giving me the highest return. Nevertheless, some investors are successfully using technical analysis to find the proper moment to start an investment (I am not talking about traders; my analysis is only for investors). The charts below give some technical analysis information.


The AFL stock price is 0.96% above its 20-day simple moving average, 0.31% below its 50-day simple moving average and 0.02% above its 200-day simple moving average. That does not indicate any trend.

Chart: TradeStation Group, Inc.

The weekly MACD histogram, a particularly valuable indicator by technicians, is negative at 0.27 and ascending, which is a bullish signal (a rising MACD histogram and crossing the zero line from below is considered an extremely bullish signal). The RSI oscillator is at 49.71, which does not indicate oversold or overbought conditions.

Analyst Opinion

Analyst opinion is divided; among the twenty analysts covering the stock, three rate it as a strong buy, five rate it as a buy, and twelve rate it as a hold.


Aflac is the largest provider of individual insurance in Japan and the leading provider of supplemental insurance in the United States. The company has compelling valuation metrics and a strong balance sheet. Aflac is generating strong cash flows and returns value to its shareholders by stock buybacks and by increasing dividend payments; Aflac has increased its annual dividend for 29 consecutive years. All these factors lead me to the conclusion that AFL stock is a smart investment right now. Furthermore, the rich growing dividend represents a gratifying income.


In order to find out how such a screening formula would have performed during the last year, last 5 years and last 15 years, I ran the back-tests, which are available by the Portfolio123's screener.

The back-test takes into account running the screen every four weeks and replacing the stocks that no longer comply with the screening requirement with other stocks that comply with the requirement. The theoretical return is calculated in comparison to the benchmark (S&P 500), considering 0.25% slippage for each trade and 1.5% annual carry cost (broker cost). The back-tests results are shown in the charts and the tables below.

One year back-test

Five years back-test

Fifteen years back-test


The dividend screen has given much better returns during the last year, the last five years and the last fifteen years than the S&P 500 benchmark. The Sharpe ratio, which measures the ratio of reward to risk, was also much better in all the three tests. One-year return of the screen was high at 22.20%, while the return of the S&P 500 index during the same period was at 14.95%.

The difference between the dividend screen to the benchmark was even more noticeable in the 15 years back-test. The 15-year average annual return of the screen was at 18.09%, while the average annual return of the S&P 500 index during the same period was only 2.80%. The maximum drawdown of the screen was at 64.09%, while that of the S&P 500 was at 57%.

Although this screening system has given superior results, I recommend readers use this list of stocks as a basis for further research.

Disclosure: I am long AAPL, MSFT. 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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