Dividend Aristocrat Aflac Inc. (AFL, Financial) recently increased its dividend by almost 18%. This is a massive increase, especially since the company has compounded its dividend at a rate of 6.6% over the last decade.
Shares of the company have increased 15.4% since I last looked at the company, but Aflac's stock continues to trade with a single-digit price-earnings multiple.
Let's dig deeper into the company to see why Aflac remains a buy following the most recent dividend increase.
Quarterly highlights
Aflac reported third-quarter earnings results on Oct. 27. Net earnings grew 217% to $2.46 billion. This included a $1.4 billion benefit resulting from deferred tax benefits due to U.S. tax regulations. Adjusting for this, earnings per share grew 23 cents, or 19.8%, from the previous year. This was also 25 cents ahead of Wall Street analysts' expectations. Revenue improved 2.3% year over year to $5.67 billion, which topped estimates by $162.8 million.
Aflac retired 10.9 million shares during the quarter at an average price of $36.70. Even accounting for this, adjusted earnings per share improved 15.2%. The company has another 110.9 million shares remaining on its repurchase authorization.
In U.S. dollars, Aflac Japan's net premiums decreased 2.3% to $3.2 billion as limited-pay products reached paid-up status. Total revenue was lower by 1.8% to $3.8 billion. Net investment income was higher by 0.6% and currency exchange improved results by 1%.
Aflac Japan continues to be impacted by the Covid-19 pandemic. Half of the company's workforce in the region is working from home and traffic to open locations is at approximately 70% of pre-pandemic figures. Covid-19-related claims have created roughly 760 million yen ($7.3 million) in claims for the year, with most of this occurring in the third quarter. By no means is this insignificant amount, but it is still well below a level where Aflac would find its business stressed.
Aflac U.S. net premiums declined 2.6% to $1.4 billion while total revenues were down 1.5% to $1.6 billion. U.S. sales were down almost 36% to $221 million. Temporary business closures and lack of access to worksites related to Covid-19 restrictions was the primary contributing factor to the decrease in net premiums and revenue. A 4.4% decrease in net investment income due to low interest rates also factored into results.
Claims related to Covid-19 in the U.S. totaled $23 million in the quarter and $57 for the first nine months of the year.
The company has taken steps to reduce costs in light of the ongoing headwinds. The company offered a separation package to eligible employees, which resulted in a 9% reduction in its U.S. and corporate workforce. Aflac's balance sheet remains in strong shape as the company has $146 million in cash and investments, which is a 4.7% increase from the prior year.
Aflac has withdrawn its guidance for the year due to uncertainty regarding the impact of Covid-19 on results, but analysts surveyed by Yahoo Finance expect that the company will earn $4.93 per share in 2020, an 11% improvement from the previous year.
Dividend and valuation analysis
On Nov. 18, Aflac announced that it was increasing its dividend 17.9% for the March 1 payment date. The company has raised its dividend for 39 consecutive years.
The company's dividend has grown with a compound annual growth rate of:
- 6.1% over the past three years.
- 6.5% over the last five years.
- 6.6% over the last 10 years.
Aflac has been fairly consistent in its dividend growth over the various periods of time, which makes this most recent raise a very bullish sign in my view.
Even with the high double-digit increase, Aflac's payout ratio isn't moving anywhere close to a dangerous place. The new annualized dividend of $1.32 would only consume 27% of expected earnings per share for the year. This is nearly identical to the 10-year average payout ratio of 25%.
The forward yield of 3% compares well with the average yield of 2.4% since 2010.
Aflac closed Friday's trading session at $43.85. Using analysts' estimates for the year, the stock has a forward price-earnings ratio of 8.9. According to Value Line, shares have an average price-earnings ratio of 10.2 since 2010.
Applying expected earnings per share to the long-term valuation results in a price of $50.29, implying a possible return of almost 15% from the most recent closing price.
GuruFocus also finds that Aflac is trading below its intrinsic value.
Aflac has a GF Value of $50.63 presently, which isn't too far off what the share price would be if the stock traded with its 10-year average valuation. Using the current price, Aflac has a price-to-GF Value of 0.87. This value earns Aflac a rating of modestly undervalued. Shares would have to increase 15.5% to reach the GF Value.
Final thoughts
Aflac continues to feel the impact of the coronavirus in both its Japan and U.S. business. Lack of access to worksite employees has meant a change to the company's normal face-to-face business operations.
Still, results for the company's two primary businesses were in the low single-digits, which isn't a big decline given the circumstances of Aflac's two operating regions.
While shares are up more than 15% since I last discussed the stock, Aflac continues to trade with a price-earnings ratio that is below both the stock's long-term historical average and its GF Value. Shareholders could be looking at an additional 15% gain from the current price if Aflac were to trade closer to its intrinsic value.
Add in a 3% dividend yield stemming from a much higher than usual dividend increase and total return potential for Aflac looks very enticing. As a result, I remain bullish on the stock and will look to add to my position when capital becomes available.
Disclosure: The author maintains a long position in Aflac Inc.
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