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Sunday, April 14, 2013

Stock Analysis: AFL

Aflac Incorporated (AFL) is a supplemental health and life insurance company and a member of the Fortune 500. AFL mainly operates in Japan and the US. Sales in Japan target health and life insurance, as well as annuity products, and account for approximately 77% of Aflac’s total revenue. In the US, Aflac sells health and disability insurance, mainly as part of employer sponsored group insurance plans.

AFL is a Dividend Champion, with a track record of 30 consecutive years of dividend increases. It pays quarterly dividends of $0.35 per share in the months of February, May, August, and November. At the current price of $50.11, AFL's dividend yield is 2.79%.

Over the past decade, AFL's annual dividend payment has increased by about 20% per year, though the rate of increase has slowed over the last five years. The 20% growth in distributions translates into a dividend payment that doubles in about 3.5 years.

Fair value estimates for AFL vary from $65.00 (MorningStar) to $68.54 (Graham Number method) to $73.20 (S&P Capital IQ). The current price of $50.11 is discounted by nearly 37% to the median of these estimates ($68.54).

AFL easily passes the following of my selection criteria:
  • Sum of dividend yield (2.79%) and 5-yr dividend CAGR (10.87%) is 13.66% (Chowder Dividend Rule)
  • Payout ratio is 21.88% (below 65%)
  • Debt to Equity ratio is 27% (below 50%)
  • 7-year weighted average dividend growth rate is 12.91% (at least 7%)
  • Forward P/E ratio is 7.37 and the trailing twelve month (TTM) P/E ratio is 8.21 (below16%)
  • 5-yr total payback percentage is 17.3% (at least 16%)
AFL passes all my selection criteria and earns 7 stars: (*******)

Other ratings for AFL

(see Recent Buy: CVX for details on these ratings)
S&P Capital IQ's Stock Report(*****)Strong Buy 
MorningStar Rating(*****)
The Motley Fool's CAPS Rating(*****)

Final Remarks

Like other companies with a strong track record of raising dividends, AFL has overcome several challenges along the way. With the Japanese earthquake and tsunami in 2011, AFL was faced with large payouts for insurance claims. In the wake of challenging times, insurance companies can (and do) adjust premiums, turning short-term setbacks into longer-term wins.

Due to AFL large exposure in the Japanese marketplace, AFL will be challenged when the dollar strengthens in relation to the yen, as is happening now. With three-quarters of revenue coming from Japan, the value of Japanese sales in dollar terms will significantly impact total revenue. On the other hand, AFL's exposure to the US marketplace has steadily increased, providing some relief.

AFL has a reputation for fast and efficient customer service and flexiblity with respect to their coverage terms. AFL also strive to take care of its investors. For example, AFL supplements income growth with share repurchases to grow EPS and dividend payments at a quicker rate.

AFL would be a good addition to DivGro because it would increase the portfolio's diversification. (AFL is in the Financial sector). At the current price of $50.11, a purchase of about $2,500 would buy 50 shares. Those shares would then contribute $70 to DivGro's annual dividend income.

Full Disclosure: As of this writing, I don't own any AFL shares, but I'm considering buying 50 shares.

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