Aflac Is At A Compelling Valuation

| About: Aflac Incorporated (AFL)

Here is a sample of some notable achievements of Aflac (NYSE:AFL) in its most recent 10 years.

  • Dividends have been increased every year(in fact for almost 3 decades), most notably an increase was seen during the recession, at a time most were cutting their dividends
  • The hikes have been substantial, going from 23 cents a share paid out in 2002 to $1.23 in 2011.
  • Revenue per share ttm has risen over 239%
  • Earnings per share ttm has risen over 269%
  • The return on equity has averaged near 20%, and is currently leaving Aflac around the 90th percentile for both its sector and industry
  • Debt levels have remained low

Despite this, the share price is down roughly 40% from its highs in spring of 2008, and the P/E ratio currently stands at 8, with a yield of 3.25%.

Investment Portfolio Risk

A major reason for this, the main reason, is the perceived risks involved with its substantial 100 billion dollar investment portfolio, much of which was recently tied into the European countries who are in so much trouble. Many steps have been taken to de-risk this, and much of the work is behind them as the company stated they were substantially finished during the last quarter, although they are still looking to lessen their European holdings. As of March 31, 2012 they show no financial or sovereign exposure to either Greece or Portugal, although there still is exposure to the remaining PIIGS, albeit significantly reduced.

Interest Rate Risk

Accounting for 75% of the company's revenues, Yen/Dollar exchange rates can skew earnings. Viewed as a risk by some, an important item to note is that their real performance is not affected by this, as the company very rarely exchanges their assets. Except for rare occasions, Yen is not converted into dollars within the company. This is only a reporting issue . With the Yen strengthening as it has been for years expected to continue, this will help their reported earnings.

Fukushima Risk

While 75% of their revenues are derived from Japan, only about 5% of Aflac's policies were in the areas hardest hit. Earnings were not revised in the aftermath in anticipation of increased claims.


With diligence being paid towards the risks in their investment portfolio, and the operations involved coming to a close, the fear involved with this should begin to be assuaged. Aflac's core business remains intact and growing, with premiums increasing by around 10% for the last ten years. Guidance has been recently revised upwards for the year by the company, with increased earnings projected for 2013 as well.

With a loyal customer base, competent and longstanding management, and one of the finest marketing devices involved with any company out there, with their famous Aflac duck commercials, Aflac enjoys a serious competitive advantage. Assuming a gradual return to valuation levels such as a P/E in the mid teens that it enjoyed for much of the recent decade, and a 3.25% dividend yield with most likely increasing dividends while waiting, there appears to be much upside potential for Aflac, with a significant margin of safety.

Disclosure: I am long AFL.

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