Aflac Inc. AFL looks well poised for growth on the back of its strong Japan and U.S. business.
One of the major steps toward streamlining Aflac’s Japan business was its branch conversion. Earlier this year, Aflac completed its conversion of the Japan branch operations to a subsidiary. The conversion provides greater legal and regulatory transparency, as well as enhances business development opportunities, reduces strategic risk, and improves cash flows and capital management within the organizational structure.
Moreover, Aflac’s business from Japan, which suffered from low interest rates in 2016 and 2017, is seeing a reversal this year albeit at a low magnitude of increase. For the first nine months of 2018, revenues from the Japan business grew by 1.4%. This turnaround has been achieved by the company from changing its product mix by emphasizing selling of third-sector products and decrease exposure to first sector products (more interest sensitive).
This change has led to a decline in the company’s business risk profile and increase in third-sector premium. Aflac’s introduction of a new cancer product this year also aided sales growth in the Japan business. Its strong and wide distribution network, which includes Japan’s post offices and traditional agencies also acted as a catalyst for sales growth in the first nine months of this year and the momemtum is expected to continue going forward.
Aflac’s U.S business, continues to perform strongly as evident from a revenue CAGR of 3% from 2008-2017, which continued through the first nine months of 2018 with revenues up 2.5%. The company has undertaken a number of growth initiatives in this segment such as the adoption of Everwell and One Pay Day for increased penetration, delivery of value-added services and increased client retention; product partnering to drive improved account values and employee access; and investment in administrative capabilities. These initiatives should drive top-line growth. In 2018, the company’s sales growth of 3% to 5% is expected to result in 2% to 3% growth in earned premium.
The company also stands to gain from the reduction in tax rates. Aflac will invest funds from tax savings in different areas such as employee welfare and business growth and provide support to childhood cancer initiatives. This development follows the passage of the tax reform by Donald Trump, which cut the corporate tax rate to 21% from 35%. Per management, this easy tax regime provides an opportunity to make investments that will further drive business growth.
Aflac continues to maintain strong risk-adjusted capital at its operating subsidiaries supported by consistent earnings and good liquidity. The company also has a strong capital management strategy in place.
Aflac is also an investors’ favorite having increased its dividend for the past 36 consecutive years. The company has also been actively buying back its shares, which shows its confidence in its business. Its balance sheet remains strong with leverage at the low end of its policy range of 20% to 25% and positive cash flows for the past many quarters.
Shares of the company have gained 3.7% in a year’s time, outperforming the industry’s decline of 6.9%. Given the strong operating fundamentals, we expect the stock to see continued growth in the coming quarters.
Aflac carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the same space are Amerisafe Inc. AMSF, Employers Holdings Inc. EIG and Unum Group UNM. Each of these stocks carries a Zacks Rank #2 (Buy), and has surpassed earnings estimates in the last reported quarter by 34.7%, 78.2% and 7%, respectively. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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