Japan Powers Aflac's Growth

2/15/2010


  Recent Price
$47
  Dividend
$1.12
  Yield

2.4%

  P/E Ratio
11
  Shares (millions)
471
  Long-Term Debt as % of Capital
24%
  52-Week Price Range
$52.16 - $10.83

Aflac’s ($47; AFL) hard-luck duck, no less ornery 10 years after its first squawk, is recognized by 94% of American consumers. Now, with the help of a new advertising agency, Aflac has launched its latest marketing blitz, “You Don’t Know Quack.” The motivation? Aflac wants to better explain what the brand actually does.

So first, a review: Aflac pays cash benefits to sick or injured policyholders. Its insurance products cover more than 50 million people. Strength in Japan (74% of 2009 sales) has offset a weak U.S. market (26%).

Aflac ranks in the top 15% of stocks in our research universe for both Value and Performance scores. Only about 1% of stocks offer such a blend of value and stock-price strength. The shares more than doubled over the last 12 months, while the S&P 500 Index rose 30%. Yet Aflac trades at less than nine times projected year-ahead earnings, versus the five-year average of 14. Aflac, yielding 2.4%, is a Focus List Buy and a Long-Term Buy.

Tale of two countries

Aflac’s Japanese roots run deep. After 35 years of operations, Aflac’s insurance policies cover one in four households. Sales in Japan rose 14% in 2009, and the December quarter’s 15% jump was the strongest quarterly gain in at least six years.

In Japan, Aflac’s most popular products include its medical policies (37% of 2009 revenue in Japan), life insurance (29%), and cancer products (28%). Aflac has found new distribution channels to sell these traditional products, the most successful being banks. More than 350 banks sell Aflac’s policies, the strongest representation of any insurer in Japan.

The recession has weighed on U.S. results. Total U.S. revenue climbed 4% in 2009, but new annualized premium sales fell 6%, down for a second consecutive year. The company attributes the weak results to factors that appear temporary: budget stress in American households and low hiring levels at existing customers.

Aflac remains cautious about its U.S. outlook until the economy stabilizes, though President Obama’s small-business initiative could provide some help later in the year. Aflac derives most of its domestic sales from small businesses, which tend to suffer the most during downturns but also possess the greatest rebound potential. Aflac says it remains well-positioned under any national health-reform program, as its supplemental coverage can complement either private or public medical insurance.

Outlook improving

Storm clouds related to Aflac’s investment portfolio are clearing. For the December quarter, Aflac reported realized investment losses of $307 million, up 17% from a year ago. However, many once-troublesome investments are looking better. Net unrealized losses fell to $640 million, down from $1.1 billion in the September quarter and $4.9 billion a year ago. The investment portfolio stands at $73.2 billion, up 2% from the end of September.

Aflac impressed Wall Street with 2010 sales and profit projections, and consensus estimates are on the rise. The insurer said it expects per-share earnings to rise 9% to 12%, versus the 9% consensus at the time of the announcement. 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

Dec '09 $1.18 vs. $0.98 + 8% $47.75 -

$39.82

12 - 10
Sep '09 1.18 vs. 0.21 + 23% 44.07 - 28.17 14 - 9
Jun '09 0.87 vs. 1.01 - 1% 37.73 - 17.25 12 - 5
Mar '09 1.06 vs.

0.98

+ 13% 46.96 - 10.83 15 - 3
           
Year
(Dec.)

Sales
 (Bil.)

Per-Share
Earnings*
Per-Share
Dividend

52-Week Price Range

P/E Ratio
Range

2009 $16.55 $4.29 $1.12 $68.81
-
$29.68 16 - 7
2008 $15.39 $2.62 $0.96 63.91
-
45.18 24 - 17
2007 $14.62 $3.27 $0.80 49.40
-
41.63 15 - 13
2006 $14.36 $2.85 $0.55 49.65
-
35.50 17 - 12
             
————————————————— Quadrix Scores † —————————————————
Overall Momen-
tum
Value Quality Financial
Strength
Earnings
Estimates
Performance
91 55 88 84 86 29 90

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


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