On Mar 19, 2014, we issued an updated research report on Aflac Inc. (AFL). This supplemental health and life insurer has been facing the brunt of a sluggish economy and low interest rates in Japan – the region that generates about three-fourth of the company’s total revenue.
Aflac continues to be harshly hit by sluggish sales, portfolio de-risking, intense economic volatility, and consistent fluctuation of the yen against the dollar along with changes in interest rates, credit spreads and defaults. Despite the re-pricing initiatives taken in Apr 2013, Aflac continues to project deteriorating trends in the WAYS sales in 2014 as well, after driving a decline of 51.3% in bank sales in 2013.
The yen/dollar exchange rate was 18.2% weaker in 2013 compared with 2012, declining operating cash flow and implying deterioration in the upcoming quarters. These factors coupled with an increase in Japan's consumption tax coming up in Apr 2014 have further impelled management to peg its earnings growth guidance in low single digits in 2014.
Light at the End of Tunnel
Despite weak sales, Aflac has been achieving its earnings target for the past 24 years, including year 2013. As a result of the shift to newer products, lower loss ratios, favorable claim trends and disciplined management of existing accounts and expenses, we expect the benefit ratio to continue to improve in the upcoming years as in 2013.
Further, Aflac has been able to maintain healthy capital and solvency ratios, also supporting its accelerated capital deployment. Along with consistent dividend hikes for the last 31 years, shares worth $800 million were repurchased in 2013 itself. Management further aims to accelerate its share buyback target by $800 million to $1.0 billion in 2014, now that most of the de-risking program has been successfully completed, thereby instilling confidence of the rating agencies and of investors in the stock.
Once the economy treads on a more stable path, we believe Aflac will be able to gain from the increased client activity and enhanced group product platform, which will be eventually reflected in top- and bottom-line growth. Based on these factors, management also expects earnings growth to gradually rebound 2015 onwards.
Overall, a balanced risk-reward balance in the near term has lifted the estimate for 2014 by 2 cents per share but have kept the same intact for 2015 in the past 30 days. The Zacks Consensus Estimate for 2014 and 2015 now stands at $6.20 a share and $6.61 per share, respectively. However, on a year-over-year basis, earnings are expected to grow by 0.3% in 2014 and 6.7% in 2015.
Key Picks in the Sector
While Aflac carries a Zacks Rank #3 (Hold), some better-ranked stocks in the financial sector include Discover Financial Services (DFS), Unum Group (UNM) and Tree.Com Inc. (TREE). All these stocks bear a Zacks Rank #2 (Buy).