Growth & Income: Aflac Inc.

Aflac Inc. (AFL) has huge brand recognition in the U.S. with its annoying white duck, but in Japan he is a superstar.

Aflac – which stands for American Family Life Assurance Company – provides supplemental health and life insurance. Aflac insures one out of every four households in the Land of the Rising Sun, and approximately three-fourths of the company’s total revenue comes from there.

Strong Earnings Growth

Total revenue climbed 15.5% from the same quarter in 2009, including an 8.5% increase in premiums. Total revenue in Japan grew by 9.2%, driven by 19.1% growth in new premium sales. Total sales growth in the U.S. was a little slower at 5.1%.

Overall benefits and claims (what Aflac pays out) as a percentage of premiums (what Aflac takes in) improved from 68.2% to 66.6%.

Earnings per share, which beat the Zacks Consensus Estimate by 2 cents, increased 84% from the same period in 2009.

A Strong Yen Benefits Aflac

The company reports third quarter earnings on October 26. Management expects earnings between $1.35 and $1.38 per share. The Zacks Consensus Estimate is within this range at $1.37.

For the full year 2010, the company expects earnings per share to be around $5.44 if the Yen/Dollar exchange rate averages about 90 for the rest of 2010.

Management outlined different EPS scenarios given the Yen/Dollar exchange rate in its latest 10Q, however. A stronger Yen would have a significant impact on EPS. For instance, given an exchange rate of 85, EPS would be much higher, between $5.61 and $5.76.

The Zacks Consensus Estimate is currently $5.47, corresponding to 13% growth year-over-year. The Yen/Dollar exchange rate is currently around 83.5, so estimates may continue to rise. Despite the Bank of Japan’s efforts, the Yen continues to strengthen against the Dollar.

The company’s objective for 2011 is to grow earnings per share by 8% to 12% over 2010 EPS. The current 2011 Zacks Consensus Estimate is $6.00, representing 10% annual growth.

Excellent History of Rewarding Shareholders

The company has paid a dividend every year since 1973. Aflac recently announced it is raising its dividend 7%, marking its 28th consecutive year of increases. Over the last 10 years, the company has increased its dividend at a compound annual growth rate of 21%, essentially doubling it every 3.3 years:

With Aflac’s strong and stable cash flow, its payout ratio of 22% is easily covered. The stock currently yields 2.1%.

The company also recently announced it intends to resume share repurchases after suspending the program in late 2008 during the financial crisis. Aflac had 32.4 million shares authorized for repurchase as of June 2010.


The valuation picture looks attractive. Aflac trades at just 9.6x forward earnings, a discount to the peer group multiple of 10.7. Factoring in Aflac’s five-year expected growth rate of 12.3%, Aflac’s PEG ratio is only 0.8.

The company boasts superior profitability with return on equity of 27.8%, compared to the industry average of 9.7%.

Aflac is based in Columbus, Georgia and has a market cap of $24.7 billion. It recently became a Zacks #2 Rank (Buy) stock.

By Todd Bunton

AFLAC INC (AFL): Free Stock Analysis Report

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