30 Years Of Value Selling For 7 Times Earnings

Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

At this point, it really can't be a question of investors not knowing about AFLAC (NYSE: AFL). The company has advertised enough to make its name synonymous with a talking duck, and the company behind the duck has now increased its dividend for 30 consecutive years. However, even with good earnings growth, and a growing dividend, the stock continues to sell for a very low price relative to earnings. In the company's most recent quarter, this trend continued, and this presents investors with yet another attractive price to acquire shares. The market at some point will wake up, and realize this duck has quite a bit to quack about.

AFLAC reported revenue growth of 14.4%, and primarily due to foreign-currency impact, adjusted EPS increased 7.27%. Since the company gets the majority of its sales from overseas, it's constantly a question of how foreign-currency will impact earnings-per-share. However, long-term investors should look at the company's underlying business fundamentals which are extremely impressive. The company operates two primary divisions comprised of AFLAC Japan and AFLAC U.S. The company's revenue growth has been driven by the Japanese unit.

Japanese revenues increased 10%, and premium income was up 10.7%. New customer's premium sales increased 31.7%, and the company's bank channel sales growth has been nothing short of remarkable. AFLAC has strong relationships with the majority of the major banks in the Japanese market. Bank sales in the past, have grown at over 100%, and this quarter they increased by 85.3%. The company's most popular product seems to be their hybrid-life policy, which showed product sales up 108.3% on a year-over-year basis. Unfortunately, foreign-currency impact caused pretax operating earnings to decrease by 1.4%. On the opposite side of the coin, AFLAC U.S. showed modest revenue growth, but significant earnings growth.

In the United States, the company's sales increased 5.2%, similar to its premium income of 5.2% as well. New premium sales were not quite as strong with just a 1.5% increase. However, the company has previously mentioned that it will take a long time to gain the trust of the major insurance agencies that are the key to the U.S. market. Even with this modest growth, the company grew pretax operating earnings by 21.5%. What has been consistently impressive with AFLAC is their financial statements and the strength of their cash flow.

One way to measure a company's strength is by looking at their gross margin. No comparison of insurance companies will be perfect, as each company specializes in different areas. However, take a look at two of AFLAC's competitors: American International Group (NYSE: AIG) and ING Group (NYSE: ING). While AIG is more well-known for being government assisted during the Great Recession, the company has decreased its government ownership by 78% over the last year or so. In addition, AIG has gotten back to business, and analysts expect over 20% earnings growth in the next few years. The company is still working on finding the right financial structure, but last quarter showed a gross margin of just under 29%.

ING is a diversified financial company offering banking, investments, and life insurance. The company is on firmer footing than AIG, and proven by their high gross margin of 53.46%. AFLAC, on the other hand, reported a gross margin of 42.57% during the recent quarter. As you can see, AFLAC comes in at the high-end of the gross margin scale, yet the market doesn't seem to understand the relative value of the shares. Another way to compare AFLAC to its competition is by the strength of its balance sheet.

In AFLAC's recent quarter, they reported an equity to assets ratio of 11.6. By point of reference, Peter Lynch once said that the equity to assets ratio was one of the most fundamental measures of strength for a financial institution. He also suggested that investors looking for a safe bet should look for an equity to assets ratio of at least 6, which indicates that AFLAC is well above Mr. Lynch's guidelines. By comparison, AIG shows a very strong equity to assets ratio of 18.85, but the company's multiple stock sales probably have a lot to do with this. ING, on the other hand, shows a relatively weak balance sheet with a ratio of just 3.98. Considering that AFLAC has none of the financial challenges of AIG, and has a significantly stronger balance sheet than ING, it seems the company is the right balance of risk and reward.

Given these positive factors, long-term investors should seriously consider adding AFLAC to their portfolio. As we've seen, the company has strong revenue growth, respectable earnings growth, and has now increased its dividend for 30 consecutive years in a row. In addition, the company's cash and total investments increased 13.63% on a year-over-year basis, which could lead to better earnings in the future. AFLAC also said that they plan on purchasing up to $100 million in shares in the fourth quarter, which should give it a lift to the stock as well. With shares selling for just over seven times projected earnings, and sporting a yield of over 2.8%, the stock looks attractive. When you combine these factors with analysts expectations for nearly 11% earnings-per-share growth in the next five years, the stock looks like an absolute steal. This isn't the first time I have recommended AFLAC, and I'm sure it won't be the last. Investors looking for a combination of good growth and income should put “the duck” at the top of their list.

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MHenage owns shares of Aflac. The Motley Fool owns shares of Aflac and American International Group and has the following options: long JAN 2014 $25.00 calls on American International Group. 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.

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