Insure Your Portfolio With This Company
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Everybody knows the Aflac (NYSE: AFL) duck, right? The charming little guy that up until recently was voice by expert bird-voice actor Gilbert Gottfried. He’s responsible for the growing popularity of the company in the United States.
What a lot of people don’t know is that the company does the vast majority of its business in Japan (where a cat joins the duck and they perform dances together!). While this means the company has greater exposure to international tragedies, such as the earthquake/tsunami along the coast of Japan in 2011, it also allows it to do well in the face of domestic problems.
When President Obama was reelected last year, larger domestic medical insurers such as UnitedHealth (NYSE: UNH) and WellPoint (NYSE: WLP) took significant hits in their stock prices. The looming effect of “Obamacare” caused both stocks to fall greater than 10% in a matter of days, and have yet to return to pre-election levels. Aflac, on the other hand, saw a much smaller dip and continued climbing up the charts.
Advantages of Operating In Japan
Insulation from risks in the U.S. is not necessarily a great reason to buy a company. If that’s all investors were looking for, there are plenty of great international companies that don’t even operate in the United States. Besides, Aflac still faces the risks involved with operating in Japan. However, as a leading life insurance company in Japan, Aflac has some distinct advantages over its domestically operating peers.
First, customer loyalty in Japan is considerably higher than in the United States. Aflac has done a fantastic job of establishing trust with the Japanese market and has grown their portfolio to include greater than 21 million life insurance policies. That number, which exceeds any of the competition in the country, creates the social proof necessary for new insurance customers to purchase an Aflac policy over the competition.
Moreover, Japanese regulation of the insurance industry is relatively rigid. The government wants to ensure the industry remains solvent, so that its citizens don’t suddenly go without insurance. As a result, entry is limited and Aflac faces less competition. Furthermore, price floors allow Aflac to produce wider margins as a low-cost provider.
Speaking of Margins
Not only does Aflac enjoy the advantage of Japanese regulations boosting its margins, the supplemental insurance business is much more margin friendly than primary insurance. Aflac sports margins more than double previously mentioned peers UnitedHealth and WellPoint.
What’s more, Aflac’s profit margins are improving. The company grew profit margin 85% over the last three years. The company’s improved efficiency has led to better earnings growth and cash flow than expected over the same period. Free cash flow has improved impressively as well, growing 159% from three years ago, outpacing growth in net income. The company now sports $3 billion in cash on its balance sheet.
Aflac currently trades at a forward P/E of just below 8. This figure is similar to WellPoint which trades at 7.9 times forward earnings and better than UnitedHealth trading at 9.9 times. While growth prospects for all three companies are similar, Aflac shines through based on its dividend.
Aflac has increased its dividend for 29 years consecutively. Over the last five years, the company has grown the dividend by greater than 10% annually. With a payout ratio lower than 25%, and improving profit margin and cash positions, the dividend ought to continue climbing. Factoring this into the company’s expected growth over the next five years makes Aflac much more attractive than the competition.
adamlevy has no positions in the stocks mentioned above. The Motley Fool owns shares of WellPoint. Motley Fool newsletter services recommend Aflac, UnitedHealth Group, and WellPoint. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!