Georgia based American Family Life Assurance Company of Columbus, better known as Aflac (AFL), offers supplemental health and life insurance in the U.S. and Japan – the two largest insurance markets in the world. Aflac serves over 50 million people worldwide with product offerings ranging from accident and disability to long-term care and cancer policies. Most of the policies are sold directly through the consumer’s place of work, bypassing the difficult task of appealing to individuals while simultaneously offering an added recruitment benefit for employers.
The company is based and listed in the United States; however, roughly 75% of its premium revenue is derived from the Japanese market. Aflac has found that writing policies in this country are quite “sticky” in that once a policy is underwritten the consumer isn’t very likely to look around for better or lower cost options.
The risks with having a large portion of a company’s revenue derived from a single country fans the spectrum from political and economic to cultural and currency unknowns. Nonetheless, Aflac has shown a tendency to thrive in this atmosphere. Additionally, the smaller or nonexistent allocation to the U.S. and other markets could indicate the potential for growth down the road.
With that, I thought it might be interesting to view this company through the lens of F.A.S.T. Graphs™.
Below I have included a look at the operating earnings (orange line) and dividends (blue shaded area and pink line) of Aflac dating back to 2001. Here we can see that operating earnings grew by about 11% per annum during this time. Further, Aflac has not only paid but also increased its dividend for 31 consecutive years – yet the payout ratio has still remained relatively low. Clearly the operating results of this company have been superb.
Now, it should be noted that these are operating earnings, otherwise referred to as “adjusted” or “Non-GAAP” numbers. That is, management has discretion in reporting these figures. Generally they are supposed to paint a more realistic picture of the company’s underlying earnings power; as one-time and non-reoccurring charges are removed. Yet some might argue that these numbers might illustrate too rosy of a picture.
Thus, I have elected to also include the company’s “basic” or accounting numbers. Here we indeed see that these earnings are not as consistent as the operating earnings – as one might expect. However, notice that despite this lack of consistency, the overall growth rate is effectively the same at 11% per year. Further, the dividends are of course identical.
Either way you view the company, earnings have been positive and increasing.
Next I would like to add price to the graph to see the historical relationship between earnings and price (black line). Here we see that from 2001 until 2008 shares generally traded hands at a bit of a premium, ranging from about 16 to 19 times earnings. However, when the recession hit, shares dropped dramatically losing about 75% of their paper value – and this despite the idea that operating (or “adjusted”) earnings actually increased while the accounting earnings decreased by about 21%. Of course a good deal of this was – and still is – a result of uncertainty regarding Aflac ’s portfolio holdings, but it’s clear that share price had become disconnected from the underlying earnings power of the company.
If we look to the performance results during this time, we can see this idea take hold. Aflac grew earnings by about 11% a year, but the price appreciation of shares was just 4% annually – a direct result of the aforementioned P/E compression.
Interestingly, despite today’s much lower multiple, an investor in Aflac still would have beat the S&P 500 by a yearly mark of about 1%. Just as impressive is the idea that an investor on 12/29/2000 would have received 1.2 times more income than the index, despite starting off with a dividend yield near 0.5%. It’s clear that a strong company and growing dividends can make up for lower P/E multiples in the future.
A key component of Aflac’s success deals in the returns and margins that it generates on capital. Below I have included the return on equity (roe) and return on invested capital (roi) for the last decade and a half. Here we see that Aflac’s return on equity has hovered in the mid teens – approaching 20% - while return on invested capital has lingered about the 12% range.
Likewise, gross profit margin (gpm) is now around 30% (a dramatic improvement from just 15 years ago). Net profit margin (npm) has also improved by great strides, jumping about 6.6% in 1999 to today’s mark around 13%.
In conjunction with the strong dividend record, Aflac has also shown a propensity to reward shareholders through stock repurchases. Common shares outstanding (csho) have gone from about 532 million in 1999 to today’s mark closer to 450 million – a nearly 1% yearly reduction rate.
If we take the items collectively, we find that Aflac has been an exceptionally strong company that has an inclination to compensate employees via growing dividends and buybacks. But of course history can only take you so far. Thus, I have also included the Estimated Earnings and Return Calculator below.
It’s important to underscore the idea that this is simply a calculator based on the median of analysts reporting to S&P Capital IQ. However, it does provide a reasonable baseline to begin viewing companies. Below we can see that analysts are expecting Aflac to grow over the intermediate term by about 7.5% a year with commensurate dividend growth. If those estimates come to fruition – and Aflac trades at 15 times earnings – this would represent an annual return of about 16% per year including dividends.
Of course it’s certainly possible that these earnings assumptions do not hold or Aflac trades at a different multiple in the future. For instance, although Aflac traded above 15 times earnings for a long time, it has not done so again since 2008. Thus, scaling back one’s assumptions might be prudent. For example, over the past 5.5 years Aflac has traded with a “normal” P/E of about 10 – nearly identical to where it stands today. If Aflac were to trade at 10 times earnings in the future, based on the same earnings and dividend estimates, this would indicate a return of about 8% - still quite respectable but certainly not as eye-catching.
Overall I find Aflac to be a compelling investment opportunity in what appears to be a more difficult market in which to invest. However, as always, I recommend that the reader conduct his or her own thorough due diligence.
Disclosure: Long AFL at the time of writing.
Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.
