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Tickers in this Article: AFL
The Aflac (NYSE: AFL) duck is one of the strongest brands today. It's genius marketing.

But there's much more to this behemoth than a clever and enduring ad campaign. The stock is a must-own.

I first wrote about Aflac for StreetAuthority three years ago. The stock is higher than when I first profiled it, and the earnings projections are right about where I put them (give or take a few cents).

Yet the market is still not that crazy about the stock. Good -- that means better prices for us.



#-ad_banner-#With a market cap of close to $30 billion, Aflac sells supplemental health and life insurance in the U.S. and Japan. Most products are underwritten on an individual basis, but the company began writing group policies in recent years.

In the U.S., Aflac's product focus is primarily asset and income loss due to illness or injury. In Japan, the company's focus is on designing products designed to help pay medical costs not covered under Japan's national health insurance system. This is where I see the most opportunity for growth in the U.S. business. But more on that later.

Aflac's financial position is probably the best insurance for investor success. The balance sheet and earnings track record are nothing short of impressive.

Annual revenue has increased at an average annual rate of about 9% over the past five years, from $16.6 billion in 2008 to $23.9 billion in 2013. Earnings per share (EPS) enjoyed an annual growth rate of 31% over the same period, from $2.62 in 2008 to $6.76 in 2013.

Even stronger are the company's historical return on equity of 20%, extremely low long-term debt-to-capital of 13%, and modest dividend payout ratio of just 21%. Speaking of dividends, Aflac has raised the dividend on its common shares for 29 years straight and recently announced a program to buy back $1 billion of its common stock this year.

Yet AFL is still relatively cheap, with a forward price-to-earnings (P/E) ratio of 9.5. Why?

More than three quarters of Aflac's revenue comes from Japan. It may be hard to believe that a little old supplemental insurance company founded in Columbus, Ga., would derive that much revenue from overseas -- but it does help explain the stock's lackluster performance.

The Japanese yen has weakened significantly against the dollar, subjecting Aflac's revenue from that country to detrimental exchange-rate fluctuations. Throw in the perpetually sluggish Japanese economy and the recovery from the Fukishima disaster, and it's hard to get excited about a company that derives 77% of its revenue from Japan. However, I think Aflac's success in Japan can be replicated in the U.S.

As I mentioned, Aflac's niche in Japan is offering insurance products that help pay for costs not reimbursed by the country's national health care plan. The same applies in the U.S., where the Affordable Care Act (aka Obamacare) may leave gaps in the health coverage of millions of Americans. Aflac is poised to fill those gaps.

In the U.S., Aflac has a distribution network of more than 76,000 independent licensed sales associates and brokers. The company is invested heavily in training and recruiting a more professional sales force.

Product design is also evolving. Aflac's flagship cancer insurance policies have incorporated several new benefits that focus on wellness and initial diagnosis that were previously offered as riders. Aflac has also rolled out dental/vision plans as well as group plans.

Aflac's traditional market -- small businesses and their employees -- may be the most affected by the fallout of Obamacare. Until recently, Aflac was seen in the U.S. primarily as an income replacement insurance provider ("What if you're hurt and can't work?"). The company is poised take advantage of its strong market position and gain further wallet share as a "comprehensive safety net" for health and well-being.

Recently, I looked at the almost bondlike qualities of Cisco (Nasdaq: CSCO), and Aflac has many of the same traits: low valuation, a strong brand, and steady, predictable results. However, one main difference is the above-average growth opportunity for the company's U.S. supplemental insurance business.

Risks to Consider: Besides the currency risk associated with the company's Japanese business, the biggest risk Aflac faces domestically are the hangover from the financial crisis of 2008 and a lackluster U.S. job recovery. To combat these risks, the company has simplified many of its products and added features to enhance customer retention.

Action to Take --> AFL currently trades near $63 with a dividend yield of 2.3%. Based on Aflac's history and prudent management, I'm setting a 12- to 18-month price target of $81. Including the dividend, that would be a total return of 31%.

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