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AFLAC – Ready to Soar

April 22, 2013 | About:

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MritikCapital
Mritik Capital Inc. is a financial advisory firm with focus on identifying quality businesses with durable competitive advantages that are undervalued. Our first goal is to preserve the capital of our clients and look for strategies for enhancing their net worth based on opportunities that present compelling risk adjusted reward.

Please note that investing offers both risks and rewards. Before investing do your own due diligence and consult your financial advisor.

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Rating: 4.3/5 (32 votes)

Comments

trinathdasari666
Trinathdasari666 - 2 years ago
Very informative about the stock and really liked the analysis

Trinath
MritikCapital
MritikCapital - 2 years ago
Thanks Trinath. I appreciate your feedback.
sww
Sww - 2 years ago
Hi can you repost it with all the .png files? Good analysis. Thanks!
MritikCapital
MritikCapital - 2 years ago
Hi Sww,

Thanks for commenting on the article. I am able to see all the image files when I view it from my pc. Are you viewing the article from a mobile device by any chance. Please clarify and I will be happy to resolve the issue once I understand it.
margaretd3
Margaretd3 - 2 years ago


Great analysis. I owned the stock until the BOJ started their aggressive monetary program. My reasoning was that in the past, even though interest rates were so low in Japan, they were getting a REAL return because of the deflationary environment. Based on my understanding, now they could have a negative return with the same low rates, but targeting 2% inflation. Can you address this because they have almost 40% portfolio exposure to JGBs. Thanks.
MritikCapital
MritikCapital - 2 years ago


Hi Margaretd3,

Thanks for commenting. You raise some very good points and it will be a mistake for Aflac to keep buying JGBs under current conditions. The company's new investment strategy of buying dollar-denominated corporate bonds and hedging the currency risk, I think is the better one. As to the existing JGB portfolio their yields are higher than current rates and I think they will hold to maturity.

As per comments from Dan Amos at March 31 conference call "currently dollar-denominated investment program represented 8.7% of total portfolio which is well below our strategic asset allocation range. Additionally, as part of our investment strategy, we have said we would invest about one-third of our cash flow in JGBs. However, with 10-year JGB yields hitting historic lows, we want to be flexible in our asset allocation. We are evaluating our investment options and looking for alternatives to lower our planned JGB new money investment allocation"

How everything plays out will only be evident over the next few years. Management seems keenly aware of the issue though and I plan to keep watching this over the next few quarters.

margaretd3
Margaretd3 - 2 years ago
Thanks for the additional info. I'm looking for a reason to get back into the stock, but you have to wonder why there is such juicy valuation. Perhaps this risk is already priced into the stock. I don't think this last quarter result reflects the true impact of the new BOJ policy, the next quarter results will be somewhat more telling. I think I'm going to wait for next quarter results before buying, esp since stocks in general are lower in the summer.

MritikCapital
MritikCapital - 2 years ago
Good Luck to you Margaretd3 . If you are not averse to it selling puts may be another strategy to get back into the stock.
MritikCapital
MritikCapital - 2 years ago
Interesting Bloomberg article on Aflac succession planning. This is more for the longer term though as Dan Amos who is 61 currently plans to stay in his current role till age 70 at-least.

Also 2013 share repurchases re-iterated to be between $400M to $600M and 2014 repurchases targeted to be between $600M to $900M. At current share price around $54.50 this should be good enough to retire 5% of shares outstanding.
margaretd3
Margaretd3 - 2 years ago
Just saw Kyle Bass on CNBC discussing his view of BOJ policy. He says they significantly underestimated the amount of bond repurchases required to keep interest rates in check. The recent spike in interest rates is shocking, yet Abe stated they will not change their current course. If govt bond interest rates continue to climb at current rates, Japan's high debt/GDP ratio could cause the economy to implode. I'm wondering what the effect of a JGB bond selloff would be on AFL EPS?
MritikCapital
MritikCapital - 2 years ago
Hi Margaretd3,

I will need to look into this interview and get back to you. Some initial thoughts for your consideration.

I don't think Japanese Govt, US Govt, UK Govt and every one printing unlimited money are going to default in the sense of not making payments. I suspect it will be a kind of indirect default by devaluing the currency and paying creditors back in fiat currency that will have less purchasing power. My understanding of AFL is that they don't plan to sell JGB's as such and will hold them to maturity. I am not sure whether there will be an accounting (non-cash) charge that would reduce reported EPS but that does not bother me.

If indeed rates rise sharply and if inflation increases due to this money printing, I think the question is whether AFL as a business in Japan has pricing power to raise the premiums in line with inflation or not. I think Japanese are very health conscious and I believe AFL has competitive advantages in Japan so I think they would be able to raise prices of their products in line with inflation.
margaretd3
Margaretd3 - 2 years ago
Although I think AFL is great on fundamentals, I went and bought puts as I don't have a lot of confidence in Japan's central bank or it's government and things might blowup over the summer volatile period. Then I might get back in on the call side in September, or outright purchase if there is more certainty in the market. In any case, it's amazing to watch what's going on in Japan. It's like a laboratory of the future of what could happen with current US monetary policy.
MritikCapital
MritikCapital - 2 years ago
Hi Margaretd3,

Good Luck with the puts. I too would be very happy to see a sell-off in AFL shares over the next few months. Japan seems to have so much debt that it seems easier for them to inflate away the debt. I think they have taken a page from Ben Bernake's playbook.
MritikCapital
MritikCapital - 1 year ago
AFL trading close to Fair Value. Covered Jan 2015 Puts.

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