Low tide wont swamp this duck

11/10/2008


  Recent Price
$49
  Dividend
$1.12
  Yield
2.3%
  P/E Ratio
13
  Shares (millions)
481
  Long-Term Debt as % of Capital
19%
  52-Week Price Range
$68.81 - $32.27

About 90% of Americans recognize Aflac’s ($49; NYSE: AFL) brand as the squawk uttered by an iconic and irascible duck, though only 6% of U.S. workers are customers. That brand awareness is impressive considering the duck commercials first aired in 2000, when Aflac had just 10% name recognition. But U.S. penetration pales next to the market share Aflac has gained in Japan, where it insures one in every four households and generates 73% of company revenue. Aflac ranks among Japan’s biggest insurers, selling products that fill gaps in a consumer’s primary insurance.

Aflac finds ways to grow earnings even in difficult sales environments. September-quarter revenue fell 4%, but the company earned $1.02 per share excluding special items, up 20%. Consensus estimates project per-share-profit growth of 14% in 2009 and 12% in 2010. Aflac is a Long-Term Buy.

Strong profit story
Sales in Japan were roughly flat in the first nine months of 2008. But pretax earnings rose 10% on high retention rates (94.6%) and improved profit margins. Aflac is expanding via Japanese banks; at the end of September, it had commitments from 196 institutions to sell cancer and medical insurance at their branches. That’s up 27% from the end of June.

Although nicked by losses on investments, the company should escape from the financial crisis in good health. In the September quarter, Aflac realized investment losses of $389 million, including $198 million for exposure to Lehman Brothers, Washington Mutual, and Ford Motor ($2; NYSE: F) bonds. Aflac has unrealized investment losses of just over $3 billion and expects more credit losses and impairments through the first half of 2009. But solid cash flow should help the company ride out the storm. And because Aflac has little exposure to products that allow customers to pull out cash, the insurer can afford to wait for some of its troubled investments to recover.

In recent years, Aflac has aggressively deployed its cash to boost the dividend and buy back shares. Aflac has raised its payout in each of the last 26 years, most recently a 17% increase announced in October. The company plans to repurchase at least 12 million shares in 2008 and another 12 million next year. In the September quarter alone, Aflac repurchased $820 million in shares.

While Aflac has the wherewithal to make strategic acquisitions, it will not bid on the assets American International Group ($; NYSE: AIG) puts up for auction. Aflac doesn’t believe the troubles of AIG and other foreign insurers will hurt its sales, and government steps to strengthen the financial system should help limit future investment losses. Financially solid underwriters like Aflac can afford to wait for conditions to improve.

Conclusion
Aflac is unlikely to meet its 2008 sales goals, but the insurer expects to grow per-share profits by at least 10% for a 12th straight year. Despite its solid growth history, operating momentum, and financial strength, the stock trades at just 11 times projected year-ahead earnings. Investors who want to own financials should consider Aflac — the only financial company we currently recommend for purchase. An annual report for Aflac Inc. is available at 1932 Wynnton Road, Columbus, GA 31999; (706) 323-3431; www.aflac.com.


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