Aflac Battered But Still Afloat

8/10/2009


  Recent Price
$40
  Dividend
$1.12
  Yield

2.8%

  P/E Ratio
9
  Shares (millions)
468
  Long-Term Debt as % of Capital
24%
  52-Week Price Range
$68.00 - $10.83

Aflac ($40; AFL), a low-cost provider of supplemental life and health insurance in Japan and the U.S., is delivering solid growth in operating profits despite the recession. But its investment portfolio, vulnerable to the fate of European banks, has kept the company in hot water.

Until those investment-related fears are resolved, Aflac — known for its ubiquitous spokesduck — must rely on strong operating performance and a sound balance sheet to win Wall Street’s affection. Per-share profits rose in least 14 consecutive years before 2008, and the dividend has been raised in each of the last 27 years. With consensus profit estimates for this year and next rising, Aflac is a Long-Term Buy.

Operating results

In the June quarter, Aflac earned $1.20 per share excluding special charges and investment losses, up 19% and $0.07 above the consensus. The yen’s strength against the dollar boosted earnings by $0.05 per share. Revenue fell slightly to $4.31 billion. New sales rose 5% in Japan but declined 11% in the U.S.

The Japan unit (74% of revenue in the past 12 months) grew sales 15% over the last year, while the U.S. segment managed 5% growth. That growth comes as Aflac pursues new venues to sell its insurance products. Aflac products are sold in 346 Japanese banks; sales through that channel jumped 106% in the June quarter. On July 1, the number of post offices selling Aflac insurance more than tripled to 1,000.

In July, Aflac announced plans to acquire Continental American Insurance Company for $100 million in cash. Such acquisitions are rare for Aflac. CAIC, which offers group-insurance products, earned $7 million in 2008. Aflac expects the deal to modestly boost 2010 earnings.

Investment portfolio

Aflac’s total investments and cash totaled $65.6 billion at the end of June, up 6% from the end of March. Since February, investors have feared investment losses could swamp the stock. The primary culprit is European hybrid securities issued by banks at risk of nationalization.

So far, those fears appear exaggerated — values of European securities have begun to recover. Unrealized losses on investments available for sale are $4.9 billion, roughly 7% of the total portfolio and down from $5.9 billion in March. The company realized $249 million in investment losses during the June quarter, on top of a total of $268 million in losses in the March and December quarters. Management expects another $374 million in investment losses for the remainder of the year. Severe losses could force Aflac to raise more capital, but so far they appear manageable, and Aflac believes it has seen the worst. 

Conclusion

Aflac shares have more than tripled from the March low but still offer plenty of upside potential. The company expects per-share growth of at least 13% to 15% in operating profits this year, though continued strength in the yen could render that target conservative. At eight times Wall Street expected earnings for the next 12 months, Aflac trades at a 42% discount to its three-year average forward P/E ratio. 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 '09 $1.20 vs. $1.01 - 1% $37.73 -

$17.25

9 - 4
Mar '09 1.22 vs. 0.99 + 13% 46.96 - 10.83 12 - 3
Dec '08 0.98 vs. 0.80 + 6% 60.73 - 29.68 16 - 8
Sep '08 1.02 vs.

0.85

- 4% 68.00 - 51.25 19 - 14
           
Year
(Dec.)

Sales
 (Bil.)

Per-Share
Earnings*
Per-Share
Dividend

52-Week Price Range

P/E Ratio
Range

2008 $16.55 $3.99 $0.96 $68.81
-
$29.68 17 - 7
2007 $15.39 $3.29 $0.80 63.91
-
45.18 19 - 14
2006 $14.62 $2.85 $0.55 49.40
-
41.63 17- 15
2005 $14.36 $2.54 $0.44 49.65
-
35.50 20 - 14
             
————————————————— Quadrix Scores † —————————————————
Overall Momen-
tum
Value Quality Financial
Strength
Earnings
Estimates
Performance
92 62 88 76 89 83 58

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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