Aflac, Inc. (AFL) is the world’s largest underwriter of supplemental cancer insurance. Aflac also sells life, health, Medicare supplement, accident and long-term care policies. The company does business in Japan and the United States. The majority of business comes from Japan which accounted for 80% of profits in 2012. Aflac has a long history of paying out annually increasing dividend payments. They have 30 years worth of consecutive dividend growth.
Dividend Growth and Current Yield
Aflac currently pays a dividend of $0.35 per quarter for a $1.40 annual dividend. At the close of market on Wednesday, October 16th AFL’s price per share was $65.64. This gives the stock a current dividend yield of 2.13% (1.40/65.64). Typically I look for a dividend yield of at least 2.5% so I wouldn’t get super excited about Aflac’s current dividend yield. In order for me to get excited about a company with such a low dividend yield I hope to see either some great growth or a great low valuation.
In 2003, Aflac payed an annual dividend amount of $0.30 per share. The dividend trend has been up each year as it now pays $1.40 annually per share. This gives AFL a 10 year annual compound dividend growth rate of 16.65%. More recently the annual dividend growth rate was 8.9% for 2011 to 2012 and 4.5% from 2012 to 2013. The more recent dividend growth has been lower than investors would probably prefer but still greater than the rate of inflation. Aflac has shown a strong commitment to it’s shareholders with their three decade long history of increasing dividends. As long as they continue to increase their dividend at a faster rate than inflation, shareholders should be pleased.
Earnings Per Share Growth
Aflac had a 2002 earnings per share (EPS) of $1.56 and a 2012 EPS of $5.86. Over the 10 years their earnings per share have been consistently climbing upward at a strong rate with only a couple down years. Aflac has had a 10 year EPS growth rate of 14.15% which is wonderful growth. More recently Aflac’s annual EPS growth rate was negative from 2010 to 2011 and an increase of 40% from 2011 to 2012. From 2010 to 2012, Aflac’s earnings per share increased by 14.23% total over the two years. Looking back over a 15 year history, Aflac has been consistently growing earnings per share with very few hiccups along the way which should make investors happy.
Net Income Growth
Net income has shown the same pattern as EPS from 2003 through 2012. Net Income was 986,000,000 in 2003 and grew to 2,750,000,000 in 2012. This gives AFL a compound annual net income growth rate of 12.07%. More recently AFL showed a decrease in profits from 2010 to 2011 and a 40% increase from 2011 to 2012. Net profits have been consistently increasing for Aflac over the last decade at similar rates with EPS.
Generally I like to see a decreasing trend or at least a consistent balance in the number of outstanding shares of the company. Since 2002 AFL has decreased their sharecount by about 9%. While this isn’t a huge decrease in the number of shares outstanding, it does show that Aflac has been gradually and consistently decreasing shares. With less shares outstanding, the value of each share still available increases. When a company decreases the number of shares available it means the shares I own will have rights to a greater portion of the companies profits.
Return on Equity Trend
When evaluating a company I look for return on equity to be consistently above 12%. Over the past 10 years, Aflac’s return on equity numbers have been between 15 and 20%. As an investor in Aflac, I would be pleased with these return on equity numbers as long as management can maintain them going forward. Maintaining a consistent return on equity would show me that management is doing a good job with shareholders investment.
Net Profit to Long Term Debt
This number tells me how many years worth of profits it will take to pay off the current long term debt of the company. I like looking at this metric because it gives me an idea of whether the company has taken on too much debt or not. Generally I look for this number to be less then 5 meaning if the company used all their earnings over the next 5 years they could wipe out all debt. For AFL this net profit to long term debt ratio stands at about 1.8 for 2012. This means Aflac would be able to pay off all long term debt with a little less than 2 years worth of profits. In my opinion Aflac does not have too much debt on their balance sheet.
Dividend Payout Ratio
The dividend payout ratio measures the dividend per share compared to the earnings per share. How much of a companies earnings per share are they paying out to shareholders in the form of a dividend. The past few years Aflac has maintained a dividend payout ratio around 20-30%. This tells me that Aflac is paying out around 30% of profits to shareholders and keeping 70% of profits to grow the company and increase shareholder value through share repurchases. I like this payout ratio because it is fairly low and I don’t believe Aflac should have any trouble maintaining dividend growth in the future even if the company faces struggles near term.
The P/E ratio is a metric I look at to determine if a companies current stock price is too high or within reason. With the most recent closing market price of $65.54 and most recent EPS of $5.86, AFL has a current P/E right around 11.2. Typically the market P/E average is right around 14 so compared to the market in whole I might determine AFL to be slightly under valued. The past few years, Aflac has generally been valued below other great dividend growth stocks and the market overall. I believe this is due to worry about the risk of their investment portfolio along with their exposure to Japan and then Yen.
Looking at AFL’s past P/E ratios of the last few years it looks like they have ranged from a high of 26 to a low of 3. During 2009 you would have been able to pick up shares as low as 3 times earnings due to the financial crisis. The average P/E over the last 10 years has been 14.4. The current P/E of 11.2 is below the average valuation you would have been able to get shares of Aflac over the past decade. Based on these figures, I believe Aflac to be trading at a pretty decent valuation right now.
AFL had EPS of $5.86 in 2012. The past earnings per share growth rate has been roughly around 14%. I like to be conservative in my projections, therefore I am going to use a more conservative EPS growth rate of 8% over the next 10 years to figure out what 2022 EPS might look like. This gives me an estimated EPS of $12.65 for AFL in 2022.
If AFL is trading at reasonable P/E ratio of 15 in 2022 then it will have a market price of $189.75/share (12.65*15). This will give me an estimated annual growth rate for Aflac of 12.52% over the next 9 years. If you would be happy with a 12.52% return over the next 9 years as well as collecting increasing dividends along the way then AFL may be a good investment for you. This is a very rough exercise based on growth estimates that may not come to reality. Actual returns in AFL will vary depending on how well the company increases their earnings and how the market values AFL in the future.
Based on the above analysis I believe Aflac to be a buy at current levels. Despite the lower current dividend yield offered by Aflac, I believe shareholders have the opportunity to pick up shares of a solid insurance industry leading company at a very good current valuation. In fact, Aflac is one of the best valued dividend growth stocks I have seen lately.
Usually if the market is valuing one company lower than the overall market or other blue chip companies it is for a reason. There are risks associated with Aflac. Aflac is a financial company. They have a large investment portfolio which brings a certain level of risk. I have recently read that Aflac management has been taking actions to lower the amount of risk taken by their investment portfolio. Another risk with Aflac is the fact that they do most of their business in Japan. This means they are collecting premiums in Japanese Yen and there is a currency risk when it comes to converting Yens to Dollars.
I’m a big fan of Aflac. I have included Aflac in my book of 35 Top Dividend Growth Stocks. It is one of my largest positions as I accumulated shares a couple years ago when they were trading with a P/E under 9. I was excited to pick up shares of a company with a solid financial past performance and a reputation for dividend growth at such a great value. I still believe Aflac is being sold at a decent value. Dividend growth investors should look closer into Aflac and give it some consideration for investment.
Do you have an opinion on Aflac? Please share your thoughts in the comments below!
Disclosure: I own shares of AFL.
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