I Continue Recommend Adding Aflac to a Diversified Portfolio

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Jan 22, 2015
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In this article, let's take a look at AFLAC Inc. (AFL, Financial), a $26.18 billion market cap company, which provides supplemental health and life insurance in Japan and the U.S.

Strategy for Growth

Japan is a primary market for the company. The firm had agreements to sell its products with about 90% of the total banks in Japan at the end of 2013. Aflac focuses on its product line, trying to diversify its distribution system and maintaining operational efficiency. The deregulation of the financial system in Japan, which demonstrates that the Japanese government has lower restrictions on the market, will increase competition. We still believe that Japanese life insurers are issuing supplemental policies, which compete with the ones of Aflac. Further, people are starting buying their insurance through the national post office: the Japan Post. The company has smaller prices than the rest of it peers, because it operates with cost advantages over them, which is determinant for pricing policies.

Attractive Dividend Policy

The firm has an attractive dividend policy showing its commitment to return cash to investors in the form of dividends as it generates healthy cash flow on a regular basis. The current dividend yield is 2.7%, which is quite good to protect the purchasing power, especially considering the consistency of track-record dividends payments; and is ahead of the industry average of 2.2%. Dividends have been paid since 1973.

Estimated One-Year Price

According to Yahoo! Finance, the estimated one-year target share price is $65.38, so if you buy shares at current market price ($58.1), your return from price appreciation would be 12.5%. In addition, you have to consider any cash flow received by the asset. So for holding the stock one year, you'll be paid a dividend of $1.56 at the end of the year. If we divide this number by current price per share, we obtain the dividend yield, which is the other component of the return on an investment for a stock, and in this case is 2.7%. So the total expected return for investing in Aflac is 15.2%, which we believe is an attractive stock return.

Revenues, Margins and Profitability

Looking at profitability, revenues decreased by 2.55% but earnings per share increased in the most recent quarter compared to the samequarter a year ago ($1.56 vs $1.50). During the past fiscal year, the company increased its bottom line by earning $6.75 versus $6.11 in the previous year. For the next year, Wall Street is expecting a contraction of 8.9% in earnings ($6.15 versus $6.75).

Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

Ticker Company ROE (%)
AFL Aflac 18.19
UNM Unum Group 10.20
TMK Torchmark Corp 12.97
MET MetLife Inc. 8.67
PRU Prudential Financial Inc 6.24
MFC Manulife Financial Corp 14.06
Industry Median 10.68

The company has a current ROE of 18.19% which is higher than the industry median and the ones exhibit by Unum Group (UNM, Financial), Torchmark (TMK, Financial), MetLife (MET, Financial) and Prudential Financial (PRU, Financial) and Manulife Financial (MFC, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.

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Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 9.1x, trading at a discount compared to an average of 17.2x for the industry. To use another metric, its price-to-book ratio of 1.48x indicates a discount versus the industry average of 1.64x while the price-to-sales ratio of 1.16x is above the industry average of 0.86x.

As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10.000 five years ago, today you could have $13.478, which represents a 6.1% compound annual growth rate (CAGR).

03May20171205221493831122.png

Final Comment

As outlined in the article, the Japan market has its peculiarities. Also, clients show some kind of loyalty once they purchase policies. Further, demographic trends are aligned with the business, because it is projected an increase in demand for supplemental policies. So, I feel confident on my bullish sentiment. Further, the PE relative valuation and the return on capital that significantly exceeds the industry average make me think it is a proper time to bet on this stock.

Hedge fund gurus like Joel Greenblatt (Trades, Portfolio), Ray Dalio (Trades, Portfolio), Jim Simons (Trades, Portfolio), Bill Nygren (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), Jeff Auxier (Trades, Portfolio), John Rogers (Trades, Portfolio) and David Dreman (Trades, Portfolio) added this stock to their portfolios in the third quarter of 2014.

Disclosure: Omar Venerio holds no position in any stocks mentioned