Aflac's Hard-Luck Duck Still Paddling

8/6/2012


  Recent Price
$44
  Dividend
$1.32
  Yield
3.0%
  P/E Ratio
7
  Shares (millions)
469
  Long-Term Debt as % of Capital
21%
  52-Week Price Range
$50.33 - $31.25

Premiums from Aflac's ($44; AFL) insurance policies provide predictable cash flows, but its investment portfolio has given investors a migraine. The shares are down 2% over the last year despite sales growth of 15% and per-share-profit growth of 9%.

Aflac's Quadrix Value score ranks in the top 5% of our research universe. Trading at seven times trailing earnings, the stock languishes below its one-year average P/E ratio of 10 and five-year average of 14. Earning an Overall score of 99, Aflac is a Buy and a Long-Term Buy.          

Business breakdown

Economic pressures and an aging population have forced Japanese consumers to shoulder more of their health-care costs. Aflac sells insurance products that defray expenses not reimbursed under Japan's national health-insurance system. No other firm can match the reach of Aflac, which has written 17% of all life insurers' individual policies in force in Japan.

In the first half of 2012, Aflac's Japan business (78% of sales) delivered 6% higher operating earnings on 12% sales growth. Growth was driven by WAYS (45% of Japan premium sales in the six months ended June, versus 18% in the first half of 2011), a life-insurance policy that can be converted to cover medical and nursing care or switched into a fixed annuity.

WAYS is primarily sold through banks, a vital channel for Aflac's Japan business. Banks accounted for 46% of Japan sales in the first half of 2012, more than double their contribution in the first half of 2011. Aflac has sales partnerships with more than 92% of banks in Japan, yet consumer awareness of bank-sold insurance remains low.

Most of Aflac's U.S. insurance policies offer supplemental coverage for those who already have insurance. U.S. operating earnings grew 7% in the first six months of the year, with sales (about 22% of company revenue) up 5%. U.S. health reform does not directly affect Aflac. But employers will likely shift more health costs to workers, potentially stoking demand for supplemental coverage.

Investment-grade securities account for 94% of Aflac's $104.68 billion investment portfolio. Aflac trimmed its exposure to PIIGS countries (Portugal, Italy, Ireland, Greece, Spain) by 10% in the June quarter and owns no sovereign or bank debt from Portugal or Greece. Under the direction of its new chief investment officer, Aflac is steering new cash flows into U.S. corporate bonds.

Conclusion

Aflac targets per-share profits of $6.45 to $6.52 this year, implying 3% to 4% growth. Should Aflac meet just the low end of its profit target and its trailing P/E rise to eight, shares will rally 18% by early 2013.

Aflac has historically tried to keep its quarterly dividend in line with per-share earnings growth, excluding currency fluctuations. Management expects to increase the dividend up to 10% in the December quarter, which would mark the 30th consecutive annual increase. Aflac yields 3.0% and has grown the dividend at an annualized rate of 10% over the past five years. An annual report for Aflac Inc. is available at 1932 Wynnton Road, Columbus, GA 31999; (706) 323-3431; www.aflac.com.

AFLAC
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Jun '12
1.61
vs.
1.55
+ 16%
46.58
-
38.13
7 - 6
Mar '12
1.74
vs.
1.62
+ 22%
50.33
-
42.30
8 - 7
Dec '11
1.48
vs.
1.33
+ 13%
47.98
-
32.74
8 - 5
Sep '11
1.66
vs.
1.45
+ 11%
47.50
-
31.25
8 - 5
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2011
22.17
6.33
1.23
59.54
-
31.25
9 - 5
2010
20.73
5.53
1.14
58.31
-
39.91
11 - 7
2009
18.24
4.85
1.12
47.75
-
10.83
10 - 2
2008
16.55
3.99
0.96
68.81
-
29.68
17 - 7
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
99
93
97
84
61
64
46

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.
   NM Not Meaningful.


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