Known for duck mascot, U.S. insurance company Aflac Inc. AFL garners 70% of its revenue from its Japanese business, where it is the oldest and biggest cancer insurance provider. In the U.S., most of its business comes from providing supplemental insurance products (i.e., disability insurance) offered through employers via payroll deductions.
Aflac is a steady performer, having paid increasing dividends for 38 years, and is a so-called "dividend aristocrat."
This works out to a yield of 2.7% and a payout ratio of 25%.
This coronavirus downturn has presented a rare opportunity to acquire this dividend aristocrat near tangible book value. A look at the 15-year chart below will confirm that the last time the stock price came close to the tangible book value was in the depth of the 2008 financial crisis. I don't think the coronavirus downturn is going to get close to the gravity of that crisis in terms of financials.
The current drop in the share price is due to the emergency 0.5% cut in the federal funds rate. Insurance companies need to hold reserves to pay off claims in safe investment assets like certificates of deposit and government bonds. If rates go down, the underlying investments that the insurance companies can buy now have lower returns. In effect, insurance companies might have to raise premiums in some cases, which may affect sales.
It is not clear yet how this will affect Aflac's book value, but the market is taking no chances and has given the stock a haircut. It appears this might have been an over-reaction. Over the last 15 years, Aflac has traded at a median price-book ratio of 1.7 (10-year median price-book is 1.51 and the five-year median is 1.44). Based on this metric, it appears that Aflac has a considerable margin of safety. Additionally, the stock has a forward price-earnings ratio of 9.5, which is below the long term median price-earnings ratio of 11.5.
Based on the low payout ratio, history and expected future earnings growth, Aflac should be a source of safe and growing dividends for years to come. Aflac is a high-quality company, with a profitable business and a strong brand, but does have a large currency exposure to Japan.
Disclosure: The author is long Aflac stock and puts.
Read more here:
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here
