Tuesday, August 19, 2014

AFLAC Incorporated (AFL) Dividend Stock Analysis

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 Japan (78% of pretax operating profits) and the U.S. Products are marketed at work sites and help fill gaps in primary coverage.

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 premium to all four valuations above. The stock is trading at a 35.5% premium to its calculated fair value of $46.94. AFL did not earn any Stars in this section.

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 two Stars in this section for 1.) and 2.) 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%. The company has paid a cash dividend to shareholders every year since 1973 and has increased its dividend payments for 32 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

The NPV MMA Diff. of the $92 is below the $500 target I look for in a stock that has increased dividends as long as AFL has. If AFL grows its dividend at 4.2% per year, it will take 8 years to equal a MMA yielding an estimated 20-year average rate of 3.08%.

Memberships and Peers: AFL is a member of the S&P 500, a Dividend Aristocrat, a member of the Broad Dividend Achievers™ Index and a Dividend Champion. The company’s peer group includes: American Independence Corp. (AMIC) with a 0.0% yield, Unum Group (UNM) with a 1.6% yield and CNO Financial Group, Inc. (CNO) with a 1.4% yield.

Conclusion: AFL did not earn any Stars in the Fair Value section, earned two Stars in the Dividend Analytical Data section and did not earn any Stars in the Dividend Income vs. MMA section for a total of two Stars. This quantitatively ranks AFL as a 2-Star Weak stock.

Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $45.60 before AFL's NPV MMA Differential increased to the $500 minimum that I look for in a stock with 32 years of consecutive dividend increases. At that price the stock would yield 3.3%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 7.5%. This dividend growth rate is higher than the 4.2% used in this analysis, thus providing no margin of safety. AFL has a risk rating of 1.50 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. Focusing on supplemental insurance products, AFL consistently generates excess returns for shareholders. Consistent earnings has allowed the company to increase its dividend and repurchase shares.

Since the start of the financial crisis, The company has taken steps to de-risk its investment portfolio. This move will likely slow earnings growth over the near-term, but should lead to higher long-term value. Management expects earnings growth to rebound 2015 onwards.

In its most recent earnings announcement, the company saw its earnings dip 0.1% over the prior year to $757 million. The decline was mostly due to a decline in sales from Japan. A weak yen/dollar exchange rate had a $0.03 negative impact on operating earnings. Including one-time items, GAAP net income in the quarter fell to $810 million or $1.78 per share from $889 million or $1.90 per share in the prior year.

AFL is currently trading at a premium to my calculated fair value price of $46.94. The stocks yield is below my minimum, so for now I will wait on a more attractive entry point before adding to my position.

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 was long in AFL (2.0% of my Dividend Growth Portfolio). See a list of all my dividend growth holdings here.

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