In this article, let's take a look at Aflac Inc. (AFL, Financial), a $26.06 billion market cap company, which provides supplemental health and life insurance in Japan and the U.S.
Geographic focus
Last year, Aflac Japan accounted for 75% of total revenues, compared to 77% in 2012, which showed that its primary market is Japan. The deregulation of the financial system in Japan, which demonstrates that the Japanese government has lower restrictions on the market, will increase competition. Aflac managed to sell its policies through banks for example, and is likely to continue to be profitable in the future.
Competition
Japanese life insurers are also making moves; they are issuing supplemental policies, which compete with the ones of Aflac. Further, people are starting to buy their insurance through the national post office: the Japan Post.
Business model
When we try to analyze its business model, we see that it has a unique distribution model. The company markets its products to companies, instead of individuals. Through this way, Alfac can have smaller prices than the competition. The company is very different than its comps and operates with cost advantages over them, something that is crucial for pricing policies.
Future actions
The plan is to continue expanding in the Japanese markets, making new product introductions. We think the deal with Japan Post is very good, because Aflac Japan can continue to be the exclusive provider of cancer insurance distributed through post offices nationwide across the country.
Attractive dividend policy
The firm has an attractive dividend policy showing its commitment to return cash to investors in the form of dividends as it generates healthy cash flow on a regular basis. The current dividend yield is 2.6%, which is quite good to protect the purchasing power, especially considering the consistency of track-record dividends payments; and is ahead of the industry average of 0.83%. Dividends have been paid since 1973. Talking about share repurchases, the firm bought back $800 million of shares last year and expands it share repurchases between $800 million to $1 billion during 2014.
Estimated one-year price
According to Yahoo! Finance, the estimated one-year target share price is $68.06 so if you buy shares at the current market price ($57.56), your return from price appreciation would be 18.2%. In addition, you have to consider any cash flow received by the asset. So for holding the stock one year, you'll be paid a dividend of $1.48 at the end of the year. If we divide this number by current price per share, we obtain the dividend yield, which is the other component of the return on an investment for a stock, and in this case is 2.6%. So the total expected return for investing in Aflac is 20.8%, which we believe is an attractive stock return.
Revenues, margins and profitability
Looking at profitability,revenues decreased by 3.41% and led earnings per share decreased in the most recent quarter compared to the same quarter a year ago ($1.78 vs $1.90). During the past fiscal year, the company increased its bottom line. It earned $6.75 versus $6.11 in the prior year. For the next year, Wall Street expects a contraction of 7.8% in earnings ($6.22 versus $6.75).
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| AFL | Aflac | 19.15 |
| UNM | Unum Group | 12.59 |
| TMK | Torchmark Corp | 13.42 |
| MET | MetLife Inc. | 7.20 |
| PRU | Prudential Financial Inc | 7.84 |
| MFC | Manulife Financial Corp | 14.42 |
| Â | Industry Median | 10.53 |
The company has a current ROE of 19.51% which is higher than the industry median and the ones exhibit by Unum Group (UNM, Financial), Torchmark (TMK, Financial), MetLife (MET, Financial) and Prudential Financial (PRU, Financial) and Manulife Financial (MFC, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 9.1x, trading at a discount compared to an average of 14.8x for the industry. To use another metric, its price-to-book ratio of 1.5x indicates a premium versus the industry average of 1.51x while the price-to-sales ratio of 1.1x is above the industry average of 0.84x.
As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10.000 five years ago, today you could have $15.587, which represents a 9.3% compound annual growth rate (CAGR).
Final comment
Apart from what we have been discussing above, the Japan market has its peculiarities; clients show some kind of loyalty once they purchase policies. Further, demographic trends are aligned with the business, because it is projected an increase in demand for supplemental policies.
The PE relative valuation and the return on capital that significantly exceeds the industry average make me feel bullish on this stock.
Hedge fund gurus like Paul Tudor Jones (Trades, Portfolio), Ray Dalio (Trades, Portfolio), Jim Simons (Trades, Portfolio), Bill Nygren (Trades, Portfolio) and Jeff Auxier (Trades, Portfolio) added this stock to their portfolios in the second quarter of 2014, as well as RS Investment Management (Trades, Portfolio).
Disclosure: Omar Venerio holds no position in any stocks mentioned
