The current environment of low interest rates, high volatility and economic uncertainty is perfect f...
Strong Brand Insures Gains for Aflac
10/18/2018 5:00 am EST
Aflac (AFL) is a diversified major insurance company; approximately 70% of its premium income is derived from Japan, with the remaining 30% from the U.S., explains Ben Reynolds, editor of Sure Dividend.
Aflac’s main competitive advantage is its strong brand. The insurance industry is highly competitive, but Aflac’s high brand recognition and effective advertising help retain clients and bring in new customers. The company invests significantly in advertising and marketing, and its Aflac duck mascot is widely recognized.
In addition, Aflac is a recession-resistant business. Insurance is a product many consumers want or need, even during recessions. This helps Aflac remain consistently profitable, even during recessions. During the Great Recession, Aflac’s earnings-per-share declined 20% in 2008, but rose 49% in 2009, and 31% in 2010.
Aflac’s most important growth catalyst is new products.These include non-traditional products such as cancer insurance. Aflac expects 2% to 3% growth in third-sector products in Japan this year. Another growth catalyst for Aflac is rising interest rates. As an insurer, Aflac has a large pool of accumulated premiums not yet paid out in claims.
Aflac ended last quarter with $127.9 billion of cash and investments, up from $121.9 billion at the same point a year ago. Higher interest rates could boost Aflac’s earnings growth by increasing its investment income. We believe the company can reasonably be expected to grow earnings by 8% per year over the long-term.
In terms of valuation, the stock currently trades for a price-to-earnings ratio of 11.7, using 2018 earnings estimates of $3.98 per share. This is slightly below our fair value estimate, which is a price-to-earnings ratio of 12.0. Over the next five years, an expanding valuation could add 0.3% to Aflac’s annual returns.
Aflac increased its dividend for 35 consecutive years, making it a Dividend Aristocrat. The stock also has a 2.2% current dividend yield, and we expect 8% annual earnings growth.
The combination of valuation changes, dividends, and earnings growth, results in total expected returns of 10.5% per year for Aflac stock over the next five years.
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