Five Reasons To Buy Aflac

11/28/2011


  Recent Price
$41
  Dividend
$1.32
  Yield
3.1%
  P/E Ratio
7
  Shares (millions)
468
  Long-Term Debts as % of Capital
19%
  52-Week Price Range
$59.54 - $31.25

Aflac ($41; AFL) ought to be reveling in its own success. As the top seller of cancer and medical products in Japan, Aflac produces predictable cash flows from premiums on insurance policies. The company has grown sales 7% and per-share profits 14% over the last year, and expectations for modest growth in 2012 (8% in sales and 4% in per-share profits) seem unduly conservative considering the company's stellar long-term record.

But Aflac's shares have been volatile, reflecting its fight against the currents of Japan's natural disaster and Europe's debt crisis. While the stock hasn't fully recovered, it is making headway, rebounding 31% from September lows. We rate Aflac a Buy and a Long-Term Buy. Below, we present five reasons for optimism.

Safer investment portfolio

Years ago, Aflac bought seemingly low-risk bonds in countries now known as the PIIGS (Portugal, Italy, Ireland, Greece, and Spain). In recent quarters, the company has aggressively curtailed the risk of its investment portfolio, with the overhaul now mostly completed. Bonds from PIIGS countries now account for 2% of the investment portfolio, down from 6% in January 2008. Bonds issued by financial institutions comprise 28% of the portfolio, down from 42% in 2008. Just 5% of Aflac's debt portfolio is rated below investment grade, versus 7% in the year-ago quarter.

Momentum in Japan

In the nine months ended September, Japan accounted for 76% of revenue from premiums and 80% of operating income. Revenue from premiums climbed 17% during the period, helped by currency gains. New annualized premium sales advanced 5% for cancer policies and more than quadrupled for WAYS, a product that allows policyholders to convert part of their life insurance to medical, nursing-care, or fixed-annuity benefits.

Optimism in the U.S.

Growth at the U.S. unit (24% of revenue, 20% of earnings) has been slower, with premium-related revenue ticking 3% higher so far this year. But Aflac could be positioning itself for a stronger recovery, with agent recruitment up 11% in 2011.

Commitment to shareholders

Aflac announced a 10% dividend hike last month, marking the 29th consecutive annual increase. Management has pledged to increase the dividend at least as fast as the company's earnings grow. Aflac projects per-share earnings will advance 2% to 5% in 2012 but expects that rate to improve in coming years. The company also plans to spend about $1.8 billion on share repurchases over the next two years, enough to buy back about 9% of shares at the current price.

Attractive value

At less than seven times trailing earnings, the stock trades 48% below its three-year average and 10% below the median for life and health insurers in the S&P 1500 Index. Based on Wall Street's 2012 profit target of $6.67 per share, Aflac trades at a 7% discount to its peer group. 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 '11
1.66
vs.
1.46
+ 11%
47.50
-
31.25
8 - 5
Jun '11
1.56
vs.
1.35
+ 2%
57.39
-
44.15
10 - 8
Mar '11
1.63
vs.
1.41
+ 1%
59.54
-
48.00
11 - 9
Dec '10
1.33
vs.
1.18
+ 15%
58.31
-
50.89
11 - 9
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2010
20.73
5.34
1.14
58.31
-
39.91
11 - 7
2009
18.24
4.85
1.12
47.75
-
10.83
10 - 2
2008
16.55
3.76
0.96
68.81
-
29.68
18 - 8
2007
15.39
3.27
0.80
63.91
-
45.18
20 - 14
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
97
68
96
72
72
80
58

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


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