Quack! Quack! It's Aflac

02/04/2010 12:00 pm EST

Focus: STOCKS

Charles Carlson

Editor, DRIP Investor

Charles Carlson, editor of DRIP Investor, says the global insurer offers a lot to all investors, especially those who want to buy through dividend reinvestment plans.

Aflac (NYSE: AFL) is the world’s largest underwriter of supplemental cancer insurance. While people in the US are familiar with Aflac's memorable (if annoying) “duck” mascot, most Americans would likely be surprised to know that the company actually does most of its business in Japan.

The firm also sells other types of insurance, including long-term care, accident, and life. Japanese operations account for around three-quarters of total revenue and profits.

Aflac has ample growth opportunities in Japan. Deregulation of insurance sales at banks has opened a new channel for Aflac to promote its products. Sales through banks now generate around 7% of Aflac’s total revenue, and that percentage is expected to grow.

In the US, business has been hampered by high unemployment—Aflac tends to sell its supplemental policies through the workplace. However, hiring should improve as the year progresses, which should be a plus.

For 2010, per-share profits are expected to jump 10% to $5.28 per share. The stock trades at just nine times the 2010 estimate, a fair price to pay for a company posting double-digit earnings growth.

One factor that has held the stock back a bit is Aflac’s investment portfolio. Among the company’s holdings include hybrid European securities, many issued by banks hit hard by the credit crisis. These securities combine features of both debt and equity. While some write-downs on these investments are likely, it appears that the firm has weathered the worst of the problems on this front.

Given that the firm’s major exposure is overseas, and given the types of products Aflac sells, I don’t see the company being a casualty of any health-care reform that comes down the pike.

DRIP investors should like what they see at Aflac:

1. A solid dividend play with a history of boosting its payout.

2. Good earnings-growth prospects for 2010.

3. An extremely user-friendly, no-fee [dividend reinvestment plan], complete with the ability to buy the first share directly.

The company’s direct-purchase plan has a number of attractive features. Minimum initial investment is $1,000. There are no fees on the buy side. Aflac administers its own plan and has an excellent reputation for quality service for its DRIP participants.

The market is overdue for a correction. Aflac will probably pull back 10% to 15% in a correction. However, I would feel very comfortable nibbling on the stock at current prices and buying more aggressively on pullbacks to the mid-$40s. (It closed below $51 Tuesday—Editor.)

The stock has had a nice run over the last nine months. However, the issue is still reasonably priced and should at least match the market return in 2010.

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