This Insurer Leads the Pack
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Successful companies in the insurance industry have the flexibility to provide shareholders the increasing stream of profits and dividends that most investors love. For investors looking to gain exposure to the financial services industry who may be wary of buying stocks in banks, insurance companies should be on your watch list.
Specifically, there’s one insurance company with a financial track record that stands above the rest. Supplemental insurer AFLAC (NYSE: AFL) is an industry leader that any value or income investor should seriously consider adding to their portfolio.
You know the duck, now get to know the stock
You’ve likely seen one of AFLAC’s commercials, and as a result, you’d probably assume AFLAC is an entirely American company. However, you may be surprised to know that that the vast majority of the company’s business is done far outside the United States. In fact, 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. In the last fiscal 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.
And, even better, AFLAC is off to a strong start to the current fiscal year as well. Revenues were roughly flat from the prior year, but first-quarter diluted EPS rose 13% year over year.
Of course, AFLAC isn’t the only insurer performing strongly in recent quarters. Dow Jones Industrial Average component Travelers (NYSE: TRV) recently reported excellent fiscal first-quarter results of $2.31 per diluted share, representing 15% growth year over year. In addition, the company grew both net income and operating income by 11% during the quarter.
Travelers isn’t just sitting on its financial windfall. The company rewards its shareholders generously through a combination of share buybacks and dividends, and that trend continued during the first quarter. Travelers repurchased 3.7 million of its own shares over the first three months of the year and announced a 9% dividend increase. At current prices, Travelers yields 2.3%.
AFLAC’s attractive valuation and dividend
Travelers is hugely successful, and the market has rewarded it with a higher multiple than AFLAC. While Travelers trades for 13 times trailing earnings and 11 times forward EPS, AFLAC exchanges hands for just 9 times on both metrics.
Meanwhile, AFLAC’s dividend track record is tough to match. Last year, AFLAC raised its dividend for the 30th year in a row, and the stock yields 2.4% at recent prices.
AFLAC isn’t the only insurer with a long streak of annual dividend increases. Fellow property and casualty insurer RLI Corp. (NYSE: RLI) has bumped its shareholder payout for 38 years in a row.
That being said, RLI is a much smaller industry player than AFLAC, with just a $1.75 billion market capitalization, versus AFLAC’s $27 billion market value. Since smaller stocks often carry higher multiples, it's not entirely surprising that RLI enjoys a much higher valuation profile than AFLAC. RLI trades for 17 times trailing EPS and 19 times forward earnings, and its dividend yield stands at just 1.7% at recent prices.
Moreover, RLI doesn’t exactly have the underlying growth to justify a higher valuation than AFLAC. The company’s first-quarter EPS grew 8% year over year, under-performing AFLAC's results.
To summarize, AFLAC carries a multi-decade track record of increasing dividends, has a market-beating yield, and holds a more attractive valuation than its industry rivals. As a result, investors interested in locking up an attractively valued insurer for decades of steady profits and dividend increases should give serious consideration to AFLAC.
Robert Ciura 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!