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Aflac Looks Even More Attractive Following Massive Dividend Increase

GuruFocus.com
·5 min read

- By Nathan Parsh

Dividend Aristocrat Aflac Inc. (NYSE:AFL) 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 Looks Even More Attractive Following Massive Dividend Increase
Aflac Looks Even More Attractive Following Massive Dividend Increase

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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This article first appeared on GuruFocus.