I am still looking at companies mainly from three sectors: consumer staples, industrials, and information technology. I do it by scanning the stock market using my broker's tools and the dividend aristocrats list. I also look at my portfolio, and from time to time go back to stocks I already own but didn't analyze for quite some time. While some stocks are constantly on the news, and I get updates about them from Seeking Alpha, others are "boring" and go under the radar.
I am not looking at financial sector, but I did decide to look at one of my oldest holdings - Aflac (AFL). The company is a dividend aristocrat that raises the dividend every year like a clock. I noticed that the valuation seems very attractive, and it is a good time to take another look at this dividend aristocrat.
I analyzed the company using my methodology as it appears in the graph below. I looked at the fundamentals, valuation, growth opportunities, and risks. I found a company that struggles a little bit to find growth. On the other hand, it does have several growth prospects that can drive earnings upwards, and the valuation offers a decent margin of safety.
(Graph created by author)
Aflac is a holding company, which engages in the provision of financial protection services. It operates through the Aflac Japan and Aflac United States segments. The Aflac Japan segment offers life insurance, death benefits, and cash surrender values. The Aflac U.S. segment sells voluntary supplemental insurance products for people who already have major medical or primary insurance coverage.
(Source: Company website)
The company is struggling to deliver top-line growth over the last decade. This happens partially due to the strong USD but mainly because of its inability to achieve growth in the Japanese business. The insurance business in Japan accounts for most of the net earned premiums and sales. The company is working on achieving growth in Japan, while in the U.S., it expects low-single digits growth rate. In the medium-term, investors should expect low-single digits top-line growth.
The EPS growth is much more impressive. I must note that the figure you see below is skewed due to one-time non-cash earnings last year that happened because of the tax cuts. The forward earnings will be around $4.2 per share according to the company's outlook. It also represents very impressive growth rate but not the one seen below. Going forward, investors should expect mid-single digits growth of EPS.
Aflac is a dividend aristocrat that raised its dividend payment for over 25 years. It is part of a unique group of financial companies that raised their dividend payments through the financial crisis of 2008. The current dividend is very safe, and when using the forward EPS of $4.2, the payout ratio is roughly at 25%. The current yield is attractive, and with another dividend raise in the coming weeks, it will be even more attractive.
The number of shares outstanding is declining steadily. The company is allocating a large part of its earnings towards it. When the valuation is so low, it makes perfect sense, and the buybacks are very effective. The company will allocate ~$1.5 billion in 2019 for buybacks, and at the current price, it will reduce the share count by over 4%. It will help the company to boost its EPS while it looks for organic growth.
The company is still struggling to achieve top-line growth, but the valuation is attractive enough to deal with it. Paying just a little more than 10 times earnings for a company that still manages to grow and offer steady stream of growing income is not a bad deal. I believe that the current margin of safety is more than adequate.
This graph from Fastgraphs supports my thesis. It shows that while the growth rate is low, the company is trading for an attractive valuation right now. Investors shouldn't ignore the lack of growth, but you can see that the company does suffer from lack of growth from time to time. It later compensates for it, and the average growth rate is over 10%. Therefore, I believe that it is attractive.
(Source: F.A.S.T. Graphs - Fundamentals Analyzer Software Tool)
When I examine the fundamentals and the valuation together, I see a company with growing earning but stagnated revenue. This is not a unique position for the company and it managed with weak top-line growth in the past. I believe that the current valuation offers reasonable margin of safety and it suits well the current growth rate. When the company manages to achieve growth, investors will enjoy price appreciation and dividend growth.
The company is trying to take part in innovation. Its latest investment in Singapore Life is part of it. Singapore Life is a company that tries to take a step further into digitalization and innovation. The insurance business is one of the sectors that were least affected by the information revolution. This process will allow the companies to be more efficient and more profitable. Therefore, I believe it is a step in the right direction.
Another opportunity is the current margin of safety. The margin of safety is useful twice. First, it lowers the downside possibility and it allows the buybacks to be more efficient. When you invest in a company with big margin of safety, you can achieve much higher average returns when the valuation comes back to its historical average.
Another growth opportunity is within Japan. While the Japan business struggles, it still accounts for most of the revenues. Japan Post invested $2.6 billion to buy a minority stake in the company. This cooperation will allow Aflac to sell its products in all of Japan Post branches around the country. It will allow the company to be leaner and achieve larger market share.
Currency exchange rates are a major risk for Aflac. The reason it poses a bigger risk compared to other companies is that the company relies solely on the Japanese yen and not on a diversified basket of currencies. The company is making an effort to hedge against currency fluctuations, but every movement in the exchange rate will still have significant effect on the company's bottom line.
Relying on Japan for growth is also a risk. The Japanese economy grows very slowly, and that's in times when massive stimulus plan is executed by the Bank of Japan. Moreover, Japan suffers from declining population, and therefore, the company will have less available customers to offer its products.
The lack of growth is another risk. The fact that the company managed to deal with in the past doesn't promise anything in the future. Moreover, while the company has some growth initiatives that's all they are - initiatives. The company hasn't shown yet a clear path for significant growth, especially in Japan which is the company's largest market. Personally, I think that the valuation suits the growth rate, but it is still worrisome.
Aflac is a dividend aristocrat that raised dividends for over 25 years. The company offers a safe dividend that will grow over time. Moreover, the company managed to slowly grow its top line and show impressive bottom line growth as well. The company is trying to achieve growth, but so far without much success. The current valuation fits the current growth rate.
I believe that while there are risks, mainly the lack of growth, the current valuation makes the company attractive. If I wouldn't have exposure to insurers or to the financial sector in general, I would have initiated a position in the company. I think that at the current price, Aflac is attractive, and investors should buy the stock, forget about it, and let it compound.
Disclosure: I am/we are long AFL. 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.