You Would be a Quack Not to Buy Here
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
One company that I've been watching for quite a while is AFLAC (NYSE: AFL). The company just can't seem to get any respect in today's market. Between constant worries about the company's investment portfolio and their exposure to European debt, and worries of slowing growth, the stock has been stuck between a rock and a hard place for the last couple of years. Long-term investors are being given yet another chance to acquire this amazing company at a very cheap price.
AFLAC's most recent earnings report shows what a difference one quarter can make. Last quarter, the company was surprised by the strength of sales from AFLAC Japan. This quarter, the company was no longer surprised, and now expects better results for the year because of this large division. While total revenues increased 16%, operating earnings were up just 3.9%. Both measures were affected by a stronger yen to dollar exchange rate. As AFLAC Japan is driving earnings growth, let's start there and see why the company expects better full-year results.
With total revenues up 9.2%, you can see that the company is having no trouble selling more of its products in its key market. Premium income increased 9.7% in yen, and net investment income was up 6.9%. However, nothing shows the strength of the company's Japanese operations better than annualized premium sales and bank sales. New premium sales rose 47.4%, and bank sales increased at a mind blowing rate of 224.2%. Since the company has agreements with the majority of large banks in Japan, an over 200% increase in sales through this channel is truly impressive. In fact, primarily due to the Japanese divisions results, the company now expects an annual sales increase for the year of between 22% and 25% in this country. While not as impressive, AFLAC U.S. turned in respectable results of its own.
In the United States, AFLAC is still working on getting in front of larger corporations, and establishing relationships with larger insurance agencies. While this is a long-term process, the company sees this as the future of the company's growth in this country. During the current quarter, total revenues were up 5.2%, and new annualized premium sales were up 1.5%. With premium income up 5.5%, and net investment income up 3.6%, the numbers aren't terrific, but this division is contributing. Due to the strength of the company's Japanese operations, and positive results in the United States, the company reaffirmed its full-year earnings outlook.
AFLAC expects full-year earnings per share of between $6.45 and $6.52. While this is on the low end of analysts current estimates, it still represents growth in an extremely difficult international economic environment. Compared to other companies in the same industry, AFLAC appears to offer the best combination of yield, expected growth, and dividend growth. When you consider that the company pays a dividend yield of over 3%, and sells for just over 6.5 times the company's lowest full-year estimate, the shares look cheap. Another positive factor is, AFLAC is expected to show earnings growth of over 11% in the next five years. Other options in the industry just don't look as attractive.
For instance, AIG's (NYSE: AIG) Chartis and SunAmerica divisions compete directly with AFLAC in the area of life insurance and disability insurance. The company does not pay a dividend, and sells for a higher multiple than AFLAC. While AIG's future growth rate is higher, the company is also majority-owned by the U.S. government. This large overhang of government owned shares, places a cap on how much the shares will gain before the government begins selling. Another direct competitor is Allstate (NYSE: ALL), which sells life insurance and accident insurance policies as well. The company is expected to see just slightly slower growth than AFLAC. The difference is, Allstate pays both a lower yield, and sells for a slightly higher multiple. The closest comparison to AFLAC's value, is UNUM Group (NYSE:UNM). This company acquired Colonial Insurance which was a longtime seller of cancer and accident insurance products. UNUM sells for nearly the same multiple, but its dividend yield is 2.7% versus 3% with AFLAC. UNUM also cannot match AFLAC's expected earnings growth. As you can see, none of the company's direct competitors can match AFLAC's combination of dividend, dividend growth, and earnings growth.
AFLAC has been working hard to improve its portfolio management and investment results. In addition, the company has been working through the process of de-risking its balance sheet over the last year or so. With extremely strong results out of the company's Japanese division, improving results here in the United States, and good cash flow, AFLAC looks like a strong long-term investment. The company is already a dividend aristocrat, and based on recent performance this streak should definitely continue. Investors looking for exposure to the insurance industry could hardly go wrong adding this duck to their portfolio.
MHenage owns shares of Aflac. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Aflac and American International Group. 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.If you have questions about this post or the Fool’s blog network, click here for information.