Are Aflac's (AFL) Dividend Hikes Sustainable? What We Think
Aflac Incorporated AFL hiked its dividend for the first quarter of 2023 to 42 cents per share from the previous level of 40 cents, maintaining its dividend growth history. Along with the update on Nov 8, the company also announced an addition of $100 million in its share buyback program.
Over the last five years, the company increased dividends six times and has an annualized dividend growth of 10.8%. The dividend yield, based on the latest payout and Dec 21 closing market price of $71.46, is approximately 2.4%, which is safe and a bit higher than the industry average of 2.2%.
Now the question arises if the hike is sustainable and whether the momentum will be retained.
The company’s earnings cover the dividends. Even though the Zacks Consensus Estimate for 2022 earnings suggests an 11.6% decline from the year-ago period to $5.25 per share, Aflac will still cover annual dividend payments of $1.60 per share. For next year, the consensus mark for earnings is pegged at $5.37 per share, which will cover the annual dividend payments of $1.68 per share.
So, the company is expected to earn enough to not only cover its dividend payments but also grow the business in the future. The latest hike is reflective of its confidence in the stability of the base business, long-term prospects and solid financial position.
Aflac exited the third quarter with total cash and cash equivalents of $4,710 million and adjusted debt of $6,762 million. Adjusted debt to adjusted capitalization came in at 22.4%, which improved 160 basis points year over year. While it had no debt maturities in less than a year, total debt maturities worth only $1,732 million were expected within the next five years.
Even though free cash flows declined 26.4% in the trailing 12-month period, robust business recovery is expected to boost the metric going ahead. Courtesy of growth investments and productivity gains, Aflac’s U.S. segment continues to perform well.
Factors like product innovations and new introductions, the build-out of virtual sales channels, an increase in face-to-face interactions, and the recruitment of agents are likely to drive the segment’s sales going forward. Also, productivity improvements at Japan Post Group are expected to support sales in the Japan business.
Considering the factors stated above, it is quite likely that Aflac will continue its dividend growth momentum in a safe and sustainable manner. Even with a hiccup in earnings in the short-term, long-term prospects remain lucrative.
Price Performance
Shares of Aflac have jumped 25% in the past year compared with the 17.6% increase of the industry.
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Zacks Rank & Key Picks
Aflac currently has a Zacks Rank #3 (Hold). Some better-ranked stocks in the broader finance space are MGIC Investment Corporation MTG, Unum Group UNM and NerdWallet, Inc. NRDS, each carrying a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Headquartered in Milwaukee, WI, MGIC Investment provides private mortgage insurance and other products in the domestic markets and internationally. The Zacks Consensus Estimate for MTG’s current year earnings indicates a 49.7% increase from the prior-year reported number.
Based in Chattanooga, TN, Unum is a financial protection benefit solutions provider. The Zacks Consensus Estimate for UNM’s 2022 bottom line indicates a 43.5% improvement from a year ago.
Based in San Francisco, NerdWallet is a digital platform operator connecting individuals and businesses with financial products suppliers. The Zacks Consensus Estimate for NRDS’ 2022 earnings signals a 74.4% improvement from a year ago.
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