Insure Your Portfolio With This Stock

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Insurance companies enjoy a two-sided business model: they earn cash from premiums paid on the policies they write and then again through investing the large pools of their accumulated capital. Many insurance companies are trading at attractive price-to-earnings and price-to-book valuations and also pay dividends to shareholders.  Unfortunately, the Federal Reserve’s monetary policy of historically low interest rates has kept a lid on the returns on capital most insurers can generate.  However, don’t let that stop you from devoting more time to the industry.  There are solidly profitable firms trading at attractive valuations operating in the insurance business.  The best among them appears to be a company with an easily recognizable brand and a high-quality business:  AFLAC (NYSE: AFL).

The three ingredients for a great insurance company

AFLAC is an insurance business that does three things extraordinarily well: a great business with increasing sales and profits, an attractive valuation profile, and a serious commitment to providing returns to shareholders.

Although you can probably recognize the AFLAC duck when you see it, what you might not know is that the vast majority of the company’s business is done far outside the United States. AFLAC derived 78% of its revenues from Japan in 2012.

While the AFLAC duck makes for funny advertisements, the company’s business is a serious moneymaker.  For the full year, total revenue was up 14.4% to$25.4 billion versus a year ago. Operating earnings for the full year were $6.60 per diluted share, compared with $2.9 billion, or $6.27 per diluted share, in 2011. Operating earnings per diluted share rose 5.3% for the year.

AFLAC reported solid operating results, but the market has not responded favorably with increasing multiples.  The stock trades for only 8 times trailing earnings and a forward P/E ratio of only 7 times.  Furthermore, the stock trades almost exactly where it did a year ago.  The market hasn't rewarded the company for its financial success, providing a compelling value opportunity for new investors.  

The company's execution has allowed it to reward shareholders handsomely over many years. AFLAC remains committed to returning cash to shareholders. In 2012, AFLAC raised its dividend for the 30th consecutive year, and the company plans to purchase $400 to $600 million of its shares in 2013.

Travelers (NYSE: TRV) is a close competitor of AFLAC's and provides insurance products in the United States.  The company has a market value of $29 billion and is a Dow Jones Industrial Average component. Travelers trades at richer valuations than AFLAC, with a trailing price to earnings ratio of 12. The company reported full-year revenue increased 1% year over year.  During 2012, Travelers generated a 9% return on equity and increased its book value per share by 8%. Travelers has raised its dividend every year since 2004 and yields 2.4% at current prices.

AFLAC also competes with MetLife (NYSE: MET), which provides insurance and a variety of financial products in the United States and internationally. MetLife has a $39 billion market capitalization and a fairly cheap valuation: the forward P/E ratio is only 6, and the price-to-book ratio stands at 0.6. MetLife pays an annual dividend that yields 2%.  In February, MetLife delivered impressive fourth-quarter and full-year results, with total revenue increasing 12% during the three-month period and 5% during 2012.

Solid history and a bright future

AFLAC has executed extremely well, especially in light of the tough economic climate over the last few years, and you should be encouraged by the company’s outlook.  AFLAC expects to increase operating earnings per diluted share 4% to 7%.

AFLAC has a lot to provide for nearly all investors.  The company has a trailing price-to-earnings ratio of only 8 and a market-beating 2.8% dividend yield.  AFLAC offers investors the chance to invest in a great insurance company that is trading at attractive multiples of its earnings and book value, and deserves your further consideration.

rciura has no position in any stocks mentioned. The Motley Fool recommends Aflac. 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!

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