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 premium to all four valuations above. When also considering the NPV MMA Differential, the stock is trading at a 71.5% premium to its calculated fair value of $51.79. AFL did not earn any Stars in this section.
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 two Stars in this section for 1.) and 2.) 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% The company has paid a cash dividend to shareholders every year since 1973 and has increased its dividend payments for 42 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 negative NPV MMA Diff. means that on a NPV basis the dividend earnings from an investment in AFL would be less than a similar amount invested in MMA earning a 20-year average rate of 3.75%. If AFL grows its dividend at 4.2% per year, it will never equal a MMA yielding an estimated 20-year average rate of 3.75%.
Peers: The company’s peer group includes: Principal Financial Group Inc (PFG) with a 3.3% yield, Unum Group (UNM) with a 2.9% yield and CNO Financial Group, Inc. (CNO) with a 2.4% yield.
Conclusion: AFL did not earn any Stars in the Fair Value section, earned two Stars in the Dividend Analytical Data section and did not earn any Stars in the Dividend Income vs. MMA section for a total of two Stars. This quantitatively ranks AFL as a 2-Star Weak stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $47.87 before AFL's NPV MMA Differential increased to the $500 minimum that I look for in a stock with 42 years of consecutive dividend increases. At that price the stock would yield 3.7%.
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 10.3%. This dividend growth rate is higher than the 4.2% used in this analysis, thus providing no margin of safety. AFL has a risk rating of 1.50 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 premium to my calculated fair value price of $51.79. With a low Free Cash Flow payout of 33% (up from 31%) and a low Debt To Total Capital of 29% (up from 27%), AFL is one that I am watching for future additions on deep price dips.
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 (3.4% of my Dividend Growth Portfolio).
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