Aflac (AFL) is an insurance company that sells voluntary supplementary insurance policies in the US and Japan. Sales in Japan account for approximately 77% of Aflac’s revenue, with the US pulling in the other 23%. In Japan, Aflac mainly sells a variety of health insurance (these cover areas not included in the national health insurance), life insurance, and annuity products. These products are sold at over 90% of the banks, and at over 1000 post offices (yes, post offices in Japan sell lots of non-postal products). In the US, Aflac predominantly sells health and disability insurance. Most of Aflac’s US products are sold as part of employer sponsored group insurance plans.
AFL Basic Company Stats
- Ticker Symbol: AFL
- PE Ratio: 8.36
- Yield: 2.80%
- % above 52 week low: 77.1%
- Beta: 1.66
- Market cap: $234.1 B
- Website: www.aflac.com
AFL vs the S&P500 over 10 years
AFL seems to be moving on par with the S&P500. After 10 years an investment in AFL would have increased by about 62%, compared to about 87% for the S&P500 as a whole. Not great, but not bad either.
AFL Earnings Per Share (EPS) & Dividend Growth
- 5 year EPS growth: 6.0%
- 10 year EPS growth: 11.7%
- 5 year dividend growth: 11.4%
- 10 year dividend growth: 20.5%
EPS growth for AFL appears to be slowing down, maybe. In addition to the numbers above, the 3 year EPS growth was 14.5%, but the one year was -15.6% (both ending in 2011 as I don’t have complete data for 2012 yet). EPS for 2012 is estimated to be considerably higher at $6.63 per share. AFL’s dividend growth has been slowing down as well. The 10 year dividend growth rate is 20.5%, the 5 year growth rate is 11.4%, the 3 year growth rate is 4.8%, and the 1 year growth rate is 7.9% (all ending in 2011). AFL’s 2012 dividends grew 8.9% from 2011. So is this a slowdown or a speedup?
All of this requires some degree of explanation. Insurance companies make money by investing the premiums received by their policy holders. 2008 and 2009 were the height of the Great Recession, where almost all of investments fell off a cliff. Predictably EPS went down. Additionally AFL sells the majority of its products through employers. So as people lost their jobs in the Recession, they also stopped buy Aflac’s insurance. Aflac also had some investments in Europe, which if you’ve been watching the news at all over the last few years, you will recall has been flirting with economic collapse and default. Aflac has been working to “de-risk” its portfolio by moving its investments away from these riskier European assets, but this process has taken a toll on its earnings. Finally, there was the 2011 Tohoku tsunami, earthquake, and Fukushima nuclear disaster combination that hit Japan.
It is possible that as Europe stabilizes, Japan rebuilds after the disaster, the US pulls itself out of the recession, and the “de-risking” is complete that AFL’s EPS and dividends will begin accelerating again. It’s possible that the 2012 numbers are an indication of this. Of course, they could also be a one-off.
With a starting yield of 2.8% and a growth rate of about 9%, AFL’s yield on cost will grow to about 7% in 10 years. In order to double the dividend, using the rule of 72, it will take approximately 8 years.
AFL Payout Ratio
AFL’s payout ratio has remained consistently low. Only topping 30% twice, during 2008 and 2009. The average payout ratio from 2002 to 2011 is 23%. Based on earnings estimates, it does not appear that the 2012 payout ratio will be much different. The low payout ratio leaves plenty of room for AFL to grow its dividends in the future.
AFL Revenue Growth
- 10 year revenue growth: 8.9%
- 5 year revenue growth: 9.6%
- 3 year revenue growth: 10.2%
- 1 year revenue growth: 6.9%
AFL has been consistently increasing its revenue over the last 10 years (up to 2011). 2012 estimates suggest that revenue will continue to grow at a nice clip as well. Increasing revenue means means increasing earnings and thus room to increase dividends.
AFL Balance Sheet
The current debt to equity ratio for AFL about 25%, which is much lower than other equities (~40%). The debt to equity ratio has increased a little over the last few years, but not enough to make me worry, as it is still well below the industry average.
The main risk to Aflac is its exposure to potentially risky European investments. However, the company has been working to divest itself of these, but has been paying the price in reduced earnings. Due to its substantial Japanese exposure, the dollar/yen exchange rate could also be another source of risk for Aflac, should the yen drop in value compared to the dollar.
AFL Valuation Panel
The Graham number represents one very simple way to value a stock. The Graham number for AFL is $68.53. The current stock price is well below that, suggesting that AFL may be undervalued at the moment.
Two Stage Dividend Discount Model
Using a risk free rate of 2%, an expected return of 10% and the beta of 1.66, the CAPM model provides a discount rate of 13.3%. Using an initial growth rate of 9% for 5 years and a slower growth rate of 7%, the two stage model produced a value of $11.28 I also tried this model with a discount rate of 10% and got $55.92.
Gordon Growth Dividend Discount Model
Using the 23.3% discount rate, this model returns a value of $9.92. Using a more conservative 10% discount rate we get a value of $71.93.
Of the five different models tested, the median value is $68.53, which is higher than AFL’s stock price suggesting that it is undervalued at the moment.
AFL Cash Secured Puts
I have mixed opinions about selling puts AFL. On one hand the company may be undervalued in the long run, so selling long term puts against it might not be a bad idea. But AFL as well as the market appear overvalued at the moment so there is always the chance that you will be assigned the stock if the market corrects.
Overall, I like Aflac as a company and as an investment. I do feel that the company is attractively valued even though the yield is a bit lower than I would like. I would consider adding to my position in Aflac.
Disclosure: I am currently long AFL.
Readers: What are your opinions about Aflac?