Aflac Ducks PIIGs, Attracts Bulls

1/10/2011


  Recent Price
$56
  Dividend
$1.20
  Yield
2.1%
  P/E Ratio
11
  Shares (millions)
474
  Long-Term Debt as % of Capital
21%
  52-Week Price Range
$58.31 - $39.91

Aflac's ($56; AFL) duck, that irascible and unflappable fowl, has endeared itself to television audiences by enduring burned feet, soccer balls to the beak, and Yogi Berra's malapropisms. The insurance company has also had its share of misadventures, most notably its investments in financially troubled European countries. However, while those European investments have weighed on the stock, Aflac held $85.59 billion in investments and cash at the end of September, up nearly 20% from the same time a year earlier. In the year ended September, Aflac's revenue rose 12% and its per-share profits jumped almost 16%.

Aflac sells supplemental life and health insurance to aging populations in the U.S. and Japan, the two biggest insurance markets in the world. In Japan, Aflac commands a 17% share of life insurance policies in force, a larger slice than any other insurer. At 11 times trailing earnings, Aflac trades 27% below its three-year average P/E and 38% below the average for financial stocks in the S&P 1500. Aflac, with a Quadrix Overall score of 96, is a Focus List Buy and a Long-Term Buy.

Business breakdown

Aflac keeps finding new ways to grow in Japan (75% of revenue in the nine months ended September), where sales rose 10% and operating earnings 19% in the first nine months of 2010. Innovative insurance products and nontraditional sales channels should sustain momentum. New annualized premium sales rose 20% through September. In the past few years, deregulation has allowed Aflac to market through banks. About 90% of banks in Japan have agreed to sell Aflac products. 

Growth in the U.S. (25%) has been tougher to find, with revenue increasing 4% and operating earnings up 9% in the nine months ended September. Still cautious about its U.S. outlook, management sees sales flat to up 5% in 2011, assuming flat U.S. employment levels. That target could prove conservative, with Aflac poised to benefit when small companies, which account for the bulk of its domestic business, begin to hire again.

About 5% of Aflac's investment portfolio consists of sovereign debt and bank bonds in the PIIGS countries (Portugal, Ireland, Italy, Greece, and Spain). To address lingering concerns, Aflac has bolstered its balance sheet, featuring net cash of $5.47 billion, or $11.54 per share, at the end of September, up from $2.69 billion a year earlier. That cash is enough to cover a total loss on the European investments, and management seems confident it can absorb sharp investment losses in Europe. As of the end of September, the investments had lost about 25% of their value. In August, Aflac raised its dividend and announced it would resume buying back shares.

Conclusion

Wall Street expects earnings per share to be up 14% in the December quarter on 21% higher revenue. Management sees per-share profits growing 8% to 12% in 2011, though continued low interest rates could pressure results toward the lower end of that range. 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
Sep '10
1.43
vs.
1.25
+ 19%
53.88
-
41.55
10 - 8
Jun '10
1.35
vs.
1.19
+ 15%
56.56
-
39.91
11 - 8
Mar '10
1.41
vs.
1.22
+ 5%
55.20
-
45.78
11 - 9
Dec '09
1.18
vs.
0.98
+ 8%
47.75
-
39.82
10 - 9
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
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
2007
15.39
3.27
0.80
63.91
-
45.18
20 - 14
2006
14.62
2.85
0.55
49.40
-
41.63
17 - 15
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
96
90
96
82
71
15
49

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


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