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Aflac is Looking Ducky Right Now

April 14, 2010 | About:
Aflac [NYSE:AFL - $55.45] provides supplemental health and life insurance. The company offers cancer plans, general medical indemnity plans, medical/sickness riders, care plans, living benefit life plans, ordinary life insurance plans, and annuities in Japan. Japanese operations provide about 75% of revenues and 78% of profits. AFL also offers accident/disability plans, cancer plans, short-term disability plans, sickness and hospital indemnity plans, hospital intensive care plans, fixed-benefit dental plans, vision care plans, long-term care plans, and life insurance products in the United States. AFL sells its products through sales associates, independent corporate/individual agencies, and affiliated corporate agencies. The company was founded in 1955 and is headquartered in Columbus, Georgia.





AFL shares got pummeled in late 2008 through early 2009 due to concerns about large holdings of limited-liquidity securities in their portfolio. As the credits markets have gradually recovered the threat from these holdings appears to have been overstated. In fact, AFL posted all-time record results in 2009 and estimates for 2010-2011 are now looking for even better results.


The shares have recovered dramatically from the 2009 lows but their current valuation is extremely reasonable based on all historical data. Here are Aflac’s per share numbers (excluding non-recurring items) as reported by Value Line:




Year


Prem. Inc.


EPS


Div.


B/V


Avg. P/E


52-wk Range


2001


15.35


1.34


0.19


10.33


21.5x


23.00 – 36.10


2002


16.71


1.56


0.23


12.43


18.8x


23.10 – 33.40


2003


19.42


1.89


0.30


13.01


17.4x


28.00 – 36.90


2004


22.44


2.30


0.38


15.04


17.2x


33.80 – 42.60


2005


24.03


2.54


0.44


15.89


16.8x


35.50 – 49.70


2006


25.00


2.85


0.55


16.93


16.1x


41.60 – 49.40


2007


26.66


3.27


0.80


18.08


16.3x


45.20 – 63.90


2008


32.03


2.62


0.96


14.23


22.0x


29.70 – 68.80


2009


35.47


3.91


1.12


17.96


8.8x


10.80 – 47.80





At yesterday’s close of $55.45 Aflac shares sell for just 10.4x the $5.35 consensus estimate for 2010 and< 9.5x the Zacks 2011 estimate of $5.86. Value Line carries an even higher $6.00 view for 2011. Except for the panic period in 2008-2009 AFL has never been offered at P/Es as low as these.


EPS almost tripled from 2001 through 2009 while dividends rose by 489%. Value Line rates AFL’s ‘financial strength’ as a B+ and notes their ‘earnings predictability’ is better than 80% of the 1700 companies in their stock research universe.


The $0.28 quarterly dividend provides a current yield of 2.02% and is well covered at about 29% of last year’s reported EPS and just 21% of this year’s expectations. The payout has been increased annually and there is expected to rise to a $0.30 quarterly rate before year-end 2010.


If, like me, you’re worried about the value of the U.S. dollar versus foreign currencies AFL also acts as a nice hedge with so much of its business generated in Japan.


While the 10-year median multiple was 18x looking backward I’m only assuming a return to about 13x projected earnings to arrive at my 12-month target price of $69.55. That would lead to a 25% gain plus the 2% yield for a total return of 27%.


Is that a rational goal? Why not? AFL shares hit highs of $63.90 and $68.80 during 2007 and 2008 when EPS were $3.27 and $2.62 versus this year’s expected $5.36.




If anything, I’m probably being too conservative.






****************************************************************************************************************


If you’re option savvy consider writing (selling) some LEAP puts on Aflac for 2011 or 2012. Here are some good choices:






Put Premium/share.


Net Cost (If Put)


Margin of Safety*


Jan. 2011 $55 Put


$5.10


$49.90


10.0%


Jan. 2012 $60 Put


$11.00


$49.90


10.0%


* Margin of Safety = % ‘if put’ price is below the $55.45 close on 4/13/2011





Dr. Paul Price


www.BeatingBuffett.com





Disclosure: Author is long AFL shares and short AFL LEAP puts for 2011 and 2012.

About the author:

Dr.Paul Price
http://www.RealMoneyPro.com
http://www.TalkMarkets.com

Visit Dr.Paul Price's Website


Rating: 3.3/5 (3 votes)

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