Monday, June 1, 2009

* AFLAC Inc. (AFL) Dividend Stock Analysis

This article originally appeared on The DIV-Net May 25, 2009.

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

Company Description: Aflac Incorporated engages in the marketing and sale of supplemental health and life insurance plans in the United States and Japan.

Fair Value: I consider 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 1.) and 3.) above. If I exclude the high and low valuations and average the remaining two, AFL is trading at a 10.2% discount. AFL earned a Star in this section since it is trading at a fair value.

Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description:
  1. Rolling 4-yr Div. > 15%
  2. Dividend Growth Rate
  3. Years of Div. Growth
  4. 1-Yr. > 5-Yr Growth
  5. Payout 15% of avg.
AFL earned three Stars in this section for 1.), 2.) and 3.) above. 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 (1999-2002, 2000-2003, 2001-2004, etc.) I consider this a key metric since dividends will double every 5 years if they grow by 15%. AFL has paid a cash dividend to shareholders every year since 1973 and has increased its dividend payments for 27 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)? 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 both of the available Stars in this section. The NPV MMA Diff. of the $45,186 is in excess of the $2,500 minimum I look for in a stock that has increased dividends as long as AFL has. If AFL grows its dividend at 16.7% per year, it will take 2 years to equal the cumulative earnings from a MMA yielding an estimated 20-year average rate of 3.64%. AFL earned a Star since its Years to >MMA of 2 is less than 5 years.

Other: AFL is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index. AFL has a solid balance sheet with debt to total capital of 24% in the most recent interim reporting period. In addition, the company generates significant free cash flows with a free cash flow dividend payout of only 11%. It has a strong market position and proven management with a consistent track record for share repurchases and dividend increases. AFL mainly invests in high-quality corporate debt and has no subprime holdings. Risks include investment losses, unfavorable movements in the yen/dollar exchange rate, lower premium growth and difficulties recruiting agents.

Conclusion: AFL earned one Star in the Fair Value section, earned three Stars in the Dividend Analytical Data section and earned two Stars in the Dividend Income vs. MMA section for a net total of six Stars. Since my scale tops out at five, this quantitatively ranks AFL as a 5 Star-Strong Buy.

Using my D4L-PreScreen.xls model, I determined the share price could increase to $85.38 before AFL's NPV MMA Differential fell to the $3,000 that I like to see for a stock with 27 consecutive years of dividend increases. At that price the stock would yield 1.31%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the needed $3,000 NPV MMA Differential, the calculated rate is 6.1%. This dividend growth rate is well below the below the 16.7% used in this analysis, thus providing a significant margin of safety. AFL has a risk rating of 2.00 which classifies it as a medium risk stock.

AFL is an interesting stock. Quantitatively it has everything an income investor looks for in a company: low debt, strong cash flows, low dividend payout ratio and a long history of increasing its dividend. However, it is a financial company and has a large exposure to other financial services companies, particularly European banks via hybrid bonds. I see this more as a limiting factor of near-term share price appreciation, not its ability to continue growing its dividend. I will continue to add to my position when the stock is trading below its $38.42 buy price and as my allocation allows. For additional information, including the stock's dividend history, please refer to its data page.

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 Income Portfolio).

What are your thoughts on AFL?