Monday, July 11, 2011

AFLAC Incorporated (AFL) Dividend Stock Analysis

This article originally appeared on The DIV-Net July 4, 2011.

Linked here is a detailed quantitative analysis of AFLAC Incorporated (AFL). Below are some highlights from the above linked analysis:

Company Description: Aflac Incorporated provides supplemental health and life insurance in the U.S. and Japan. Products are marketed at work sites and help fill gaps in primary insurance coverage. Approximately 80% of earnings comes from Japan and 20% from the U.S.

Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:

1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number

AFL is trading at a discount to only 3.) above. The stock is trading at a 19.4% discount to its calculated fair value of $57.9. AFL earned a Star in this section since it is trading at a fair value.

Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:

1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%

AFL earned three Stars in this section for 1.), 2.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. AFL earned a Star for having an acceptable score in at least two of the four Key Metrics measured.

Rolling 4-yr Div. > 15% means that dividends grew on average in excess of 15% for each consecutive 4 year period over the last 10 years (2001-2004, 2002-2005, 2003-2006, etc.) I consider this a key metric since dividends will double every 5 years if they grow by 15%. The company has paid a cash dividend to shareholders every year since 1973 and has increased its dividend payments for 29 consecutive years.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:

1. NPV MMA Diff.
2. Years to > MMA

AFL earned a Star in this section for its NPV MMA Diff. of the $4,399. This amount is in excess of the $600 target I look for in a stock that has increased dividends as long as AFL has. If AFL grows its dividend at 15.0% per year, it will take 4 years to equal a MMA yielding an estimated 20-year average rate of 4.%. AFL earned a check for the Key Metric 'Years to >MMA' since its 4 years is less than the 5 year target.

Memberships and Peers: AFL is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index and a Dividend Champion. The company's peer group includes: Delphi Financial Group, Inc. (DFG) with a 1.7% yield, Unum Group (UNM) with a 1.5% yield and CNO Financial Group, Inc. (CNO) with a 0.0% yield.

Conclusion: AFL earned one Star in the Fair Value section, earned three Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of five Stars. This quantitatively ranks AFL as a 5 Star-Very Strong stock.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $92.66 before AFL's NPV MMA Differential decreased to the $900 minimum that I look for in a stock with 29 years of consecutive dividend increases. At that price the stock would yield 1.29%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $600 NPV MMA Differential, the calculated rate is 8.7%. This dividend growth rate is well below the 15.0% used in this analysis, providing a significant margin of safety. AFL has a risk rating of 1.25 which classifies it as a Low risk stock.

Operating in the two largest insurance markets in the world (U.S. and Japan,), AFL has built a tremendous low-cost distribution system. Concerns about AFLs investment portfolio, which holds European bank hybrid bonds and European sovereign debt, have eased. The recent earthquake in Japan could result in higher, but manageable, claims.

AFL is starting to look more interesting. Its yield of 2.57% is well above its long-term average. I sold AFL in August 2010 at $51.38 when it failed to raise its dividend (which it did subsequently). AFL is currently trading below my fair value price of $57.90 and below the $51.38 that I sold it for in 2010. I will continue to evaluate the stock for possible buy.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I held no position in AFL (0.0% of my Income Portfolio). See a list of all my income holdings my income holdings here.

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