Company Description: Aflac Incorporated provides supplemental health and life insurance in Japan and the U.S. Products are marketed at work sites and help fill gaps in primary coverage.
Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:
1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number
AFL is trading at a discount to 1.), 3.) and 4.) above. When also considering the NPV MMA Differential, the stock is trading at a slight discount to its calculated fair value of $34.13. AFL earned a Star in this section since it is trading at a fair value.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%
AFL earned three Stars in this section for 1.), 2.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. AFL earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1973 and has increased its dividend payments for 38 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
1. NPV MMA Diff.
2. Years to > MMA
The NPV MMA Diff. of the $460 is below the $500 target I look for in a stock that has increased dividends as long as AFL has. The stock's current yield of 3.39% exceeds the 2.74% estimated 20-year average MMA rate.
Peers: The company’s peer group includes: Principal Financial Group Inc (PFG) with a 6.2% yield, Unum Group (UNM) with a 7.8% yield and CNO Financial Group, Inc. (CNO) with a 2.7% yield.
Conclusion: AFL earned one Star in the Fair Value section, earned three Stars in the Dividend Analytical Data section and did not earn any Stars in the Dividend Income vs. MMA section for a total of four Stars. This quantitatively ranks AFL as a 4-Star Strong stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $32.08 before AFL's NPV MMA Differential increased to the $500 minimum that I look for in a stock with 38 years of consecutive dividend increases. At that price the stock would yield 3.5%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 3.0%. This dividend growth rate is higher than the 2.8% used in this analysis, thus providing no margin of safety. AFL has a risk rating of 1.00 which classifies it as a Low risk stock.
Operating in the two largest insurance markets in the world (U.S. and Japan), AFL has built a tremendous low-cost distribution system. Focusing on supplemental insurance products, AFL consistently generates excess returns for shareholders. Consistent earnings has allowed the company to increase its dividend and repurchase shares. AFL is currently trading at a slight discount to my calculated fair value price of $34.13. With a low Free Cash Flow payout of 15% (flat with prior) and a low Debt To Total Capital of 20% (up from 18%), AFL is one that I am watching for future additions.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I was long in AFL (1.6% of my Dividend Growth Portfolio).
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Tags: AFL, PFG, UNM, CNO,
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