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AFLAC Inc

5/28/2014

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I love insurance companies. They take in tons of money and they may or may not ever pay out any as claims. They're essentially betting that you'll stay healthy, you're betting you'll get sick. Chances are you'll stay healthy. No one wants to get sick.

In addition, they have the opportunity to invest those funds and make even more money for their shareholders while waiting for a claim to be settled. 

I want to be one of those shareholders.
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  • Aflac has a dividend yield of 2.41% and an expected one year capital gain of 12.78% for an expected total one year return of 15.19%.
  • To understand this company is to understand that it's really two companies operating in two different countries and their financials are consolidated into one currency.
  • The company is getting back on track after a rough 2013. 
  • The 10% fall from the stock's high of $66.81 is creating a buying opportunity.

The Company
Aflac Incorporated (AFL), through its subsidiary, American Family Life Assurance Company of Columbus, provides supplemental health and life insurance products. The company offers various voluntary supplemental insurance products, including cancer plans, general medical indemnity plans, medical/sickness riders, care plans, living benefit life plans, ordinary life insurance plans, and annuities in Japan. It also offers products designed to protect individuals from depletion of assets, which comprise accident, cancer, critical illness/critical care, hospital intensive care, hospital indemnity, fixed-benefit dental, and vision care plans; and loss-of-income products, such as life and short-term disability plans in the United States. The company sells its products through sales associates and brokers, independent corporate agencies, individual agencies, and affiliated corporate agencies. Aflac Incorporated was founded in 1955 and is headquartered in Columbus, Georgia. (Daily Chart) (Weekly Chart)
27 May 2014
Price  $61.34
1yr Target  $69.18
Analysts  17
1yr Cap Gain  12.78%
Dividend  $1.48
Yield  2.41%
1yr Tot Return  15.19%
3yr DGR  7.39%
5yr DGR  7.56%
Payout Ratio  21.30%

Beta  1.65
EPS (ttm)  $6.45
EPS next yr  $6.57
P/E  9.51
PEG  1.81
ROA  2.50%
ROE  20.40%

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Almost everyone has seen those Aflac commercials where the Aflac duck runs around quacking while the announcer talks about how Aflac pays its policyholders when they get sick or hurt so that they can pay their everyday expenses. For nearly six decades, Aflac insurance policies have given policyholders the opportunity to focus on recovery rather than financial stress bringing comfort to individuals primarily in both the United States and Japan. In the United States, Aflac is the leading provider of voluntary insurance at the worksite. In Japan, Aflac is the number one life insurance company in terms of individual policies in force. Aflac individual and group insurance products help provide protection to more than 50 million people worldwide.

The best way to understand the fundamentals of Aflac is to look at company as two separate companies - one located in the United States and one located in Japan. By doing so it's easier to understand the profitability of each part of the company. In the end, all revenues and earnings from both parts of the company are translated from yen into dollars and the exchange rate often distorts an understanding of the profitability of the overall company. When the yen is strong, profits are artificially strong in terms of dollars and when the yen is weak, profits are artificially weak in terms of dollars. 


Since a substantial portion of Aflac's business is done in Japan and the yen has had a nearly 10% weaker yen/dollar exchange rate recently, the company's results have been flat in 2013. Excluding the impact of currency, the company notes its operating earnings per share would've increased by $0.10, or 6%.

Recent fundamentals on a country specific basis are as follows.

AFLAC JAPAN

In yen terms, Aflac Japan's premium income rose 1.4% in the first quarter of this year and net investment income increased 9.4%. Investment income growth was magnified by the weaker yen/dollar exchange rate because approximately 45% of Aflac Japan's first quarter investment income was dollar denominated, compared with 40% a year ago. Total revenues were up 2.2% in the first quarter. The pretax operating profit margin increased in the first quarter to 22.0% from 21.5% in the prior year and pretax operating earnings in yen increased 4.6% on a reported basis and 1.5% on a currency neutral basis.

Aflac Japan's growth rates in dollar terms for the first quarter were suppressed as a result of the weaker yen/dollar exchange rate. Premium income decreased 8.8% to $3.6 billion in the first quarter and net investment income was down 1.7% to $663 million. Total revenues decreased 8.1% to $4.2 billion. Finally pretax operating earnings declined 5.7% to $933 million.

In the first quarter, total new annualized premium sales fell 48.7% to ¥27.6 billion, or $268 million. Third sector sales, which include cancer and medical products, increased 1.8% in the quarter. 

AFLAC U.S.

Aflac U.S. premium income increased 1.1% to $1.3 billion in the first quarter and net investment income was up 2.5% to $161 million. Total revenues increased 1.2% to $1.5 billion. The pretax operating profit margin increased to 20.8% from 19.5% a year ago, reflecting improvements in both the benefit and expense ratios, and pretax operating earnings were $303 million, an increase of 7.9% for the quarter.

Aflac U.S. total new annualized premium sales decreased 4.4% in the quarter to $318 million. Additionally, persistency in the quarter was 73.8%, compared with 74.7% a year ago.

The Fundamentals
The fundamentals of the company are being affected by yen/dollar currency exchange rates resulting in revenues and earnings falling in dollar amounts. This is simply an exchange rate problem but it's a real problem for any company operating on a world wide basis and repatriating revenues and earnings back into dollars. Despite this exchange rate problem, the fundamentals of the company continue to improve (in currency neutral terms). As exchange rates reverse the revenues and earnings will then be pushed artificially higher and once again an investor will have to understand the nature of the business in local currencies to understand the true profit and loss picture. Investors that understand this will feel more comfortable owning stock in companies like Aflac. 

Year
2015 Est
2014 Est
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
Revenue
$23.43 Bil
$22.96 Bil
$23.93 Bil
$25.36 Bil
$22.17 Bil
$20.73 Bil
$18.25 Bil
$16.55 Bil
$15.39 Bil
$14.61 Bil
$14.36 Bil
$13.28 Bil
$11.44 Bil
Earnings
$6.57
$6.23
$6.76
$6.11
$4.12
$4.92
$3.19
$2.62
$3.31
$2.95
$2.92
$2.52
$1.52
Dividends
$1.60
$1.52
$1.44
$1.36
$1.26
$1.16
$1.12
$1.00
$0.85
$0.60
$0.46
$0.39
$0.32
Payout Ratio
24.35%
24.39%
21.30%
22.25%
30.58%
23.57%
35.10%
38.16%
25.67%
20.33%
15.75%
15.47%
21.05%

Growth rates for revenues, earnings and dividends are listed below. While revenue and earnings rates seem to be slowing, their rates are very impressive with a 3 year earnings growth rate above 11%. Assuming earnings growth rates continue at this pace, I expect dividends to increase proportionally in the future since payout ratios are already low.

Revenues Growth Rates
3yr =  4.85%
5yr =  7.65%
10yr = 7.65%

Earnings Growth Rates   
3yr =  11.05%
5yr =  20.87%
10yr = 16.09%

Dividend Growth Rates   
3yr =  7.39%
5yr =  7.56%
10yr = 16.23%

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The Technicals
Both the daily and the weekly charts are showing a stock that is in a slight retreat from recent levels (approximately 10%). The MACD in both charts is falling below the zero line so the company is setting up for a move higher once it finds support. Without additional upward or downward pressure apparent at this time (see the ADX), this stock looks like it'll move sideways for a little while. This just may be an opportune time to start accumulating a position in this company. With a stock priced just over $61 per share and my available dividend income, it will take me a while to accumulate a sizable position. Luckily a company like Aflac, whose stock is moving sideways, will provide me the time to find the funds to begin and add to a position in this stock.  

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Daily Chart
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Weekly Chart

The Competition
Aflac Inc is part of the Accident and Health Insurance Industry which is part of the Financial Sector of the economy. Below is a list of the major corporations included in this industry and they are listed in the order of their market capitalization.
  1. AFLAC Inc.
  2. Unum Group  (UNM)
  3. Assurant Inc.  (AIZ)
  4. CNO Financial Group, Inc.  (CNO)
  5. StanCorp Financial Group, Inc.  (SFG)
  6. ProAssurance Corp.  (PRA)
  7. Employers Holding, Inc.  (EIG)

Conclusion
I'm a current holder of a few shares of this company and this review has only convinced me even more that owning these shares is a profitable position to be in. Based on the 2.41% yield and the 21% payout ratio, I feel that the dividend, as well as the growth of the dividend, is safe for many years to come. Along with a projected 12.78% capital gain over the next year, I feel that this is a great time to be holding and accumulating this stock. I intend to own shares in this company for many years to come and to add to my position as additional funds become available. 

Good Luck and Good Trading.

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    Author

    I am an Individual Investor with specific interest in long term growth and then enhancing my returns with income from dividends and derivatives. I don't recommend stocks to anyone (it's a good way to lose friends) and no one reading this should misinterpret my blog as a recommendation for any type of investment. I am writing this solely for myself and my kids.


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