Sunday, April 7, 2019

Aflac: Japan’s Largest Cancer Insurer

By Peter Bosworth of

Until recently, cancer was a taboo word in Japan.

In 1987 Emperor Hirohito underwent surgery for internal hemorrhaging due to a cancerous small intestine. Japanese officials stoutly denied there were any signs of cancer, though to the Japanese public the writing was on the wall.

It was common then for cancer patients to be denied the right to know their diagnosis. Later on, instead of outright denial, doctors would dance around the issue, and give certain nonverbal hints to patients. A 1988 piece on the subject from the Los Angeles Time quotes Hiroshi Wagatsuma, an anthropologist who researched this tacit communication: “Even if the doctor says nothing, the patient knows that he has cancer; and though nothing is said, the doctor knows that the patient knows.”

That culture of fear, silence, and death made fertile grounds for the cancer insurance provider, Aflac. Japan offers National Health Insurance, but the many additional costs associated with cancer treatment made auxiliary insurance necessary. Aflac (AFL) has established itself as the country’s premier cancer insurance provider. Within Aflac’s first year in Japan, 1974, the company had written $25 million in premiums. In 2017, 70% of the company’s total revenue came from Japan. In Forbes’ 1994 profile of the company they described CEO John Amos’ approach: “He didn’t know much about cancer statistics, but figured that where there was fear there was an opportunity to charge premiums high enough to make money.”
The fear about cancer was there, but cancer insurance was not. Aflac filled that void in 1974. For the first few years, Aflac was the only company selling cancer insurance making them a literal monopoly.

In 2012, 77% of the company’s total revenue came from Japan. Aflac is now a $37 billion business and the majority of their revenue still comes from Japan. Just last year they pulled in $22 billion in sales. Aflac maintains a solid credit rating (A-) from the S&P which allows them to issue cheap debt to grow the business and pay dividends. They’ve increased their dividend every year since 1992 making them a dividend aristocrat.

In December, Japan Post Holdings acquired about 7% of Aflac’s shares. The deal will boost the presence of Aflac’s cancer insurance products throughout 20,000 postal outlets across Japan.

10-Year Dividend History

Aflac has some of the most reliable long-term dividend growth around. The company paid investors $0.56 per share a decade ago. Over the last 10 years, the dividend has climbed to $1.04. That's an 86% increase and you can see the annual changes below...

The compound annual growth is 6.4% over 10 years, but over the last year, the dividend climbed 19.5%. The increase in dividend growth is a good sign. Aflac might work out as a great income investment. Let's take a look at the yield...

Current Yield vs. 10-Year Average

Aflac's long history of paying dividends makes it one of the best dividend stocks around. This also makes the dividend yield a great indicator of value. A higher yield is generally better for buyers. Sustainability is also vital, and the recent deal with Japan Post is a good sign of future growth.

The dividend yield comes in at 2.17% and that's below the 10-year average of 2.87%. The chart below shows the dividend yield over the last 10 years...

The lower yield shows that investors have bid up the company's market value. They might be expecting higher growth and payouts. But more often than not, the dividend yield is mean reverting with share price changes.

Improved Dividend Safety Check

Many investors look at the payout ratio to determine dividend safety. They look at the dividend per share divided by the net income per share. So, a payout ratio of 60% would mean that for every $1 Aflac earns, it pays investors $0.60.

The payout ratio is a good indicator of dividend safety, but, accountants can manipulate net income. They adjust for goodwill and other non-cash items. A better metric is free cash flow.

Here's Aflac payout ratio based on free cash flow over the last 10 years...

The ratio is volatile over the last 10 years and the trend is up. The last reported year shows a payout ratio of 13.3%. This gives plenty of room for Aflac to pay out dividends in the future. As a dividend aristocrat, it is fair to classify Aflac as a shareholder-friendly company.

If you’re interested in learning more about dividend investing, this page is an invaluable resource.

Good investing,

This article was written by Peter Bosworth of
The author is an ardent dividend growth investor on a journey towards early retirement.
He enjoys discussing all things finance.


  1. So is it a buy a this price/yield/payout ?

    1. The author may want to chime in, but I think it depends on your preferences.

      Personally, I prefer to buy when stocks are trading at discounts of at least 10%. It looks like AFL is trading about 7% above fair value, based on a comparison of current yield with 5-year average yield. Be aware, though, that some high-quality dividend growth stocks rarely trade well below fair value. According to FASTGraphs, the last time AFL traded below fair value was in 2016.


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