Aflac (AFL) is one of the dividend aristocrats and have taken a small hit year-to-date of about 6% to their stock price. The one tough thing to swallow is it’s heavy operations in Japan and then the remaining portion in US. This may cause currency translation fluctuations, as well as having too many of your eggs in 1/few baskets. Let’s dive into this stock, as I actually have a position in them already, they are a nice aristocrat (increasing dividends for 25+ years) and are one of few stocks to be on the downside Year-To-Date.
From using our Dividend Stock Screener attributes, let’s analyze Aflac:
Dividend Increases: When it comes to Dividend increases from Insurance companies, Aflac plays with the best of them. Where AFL has raised the dividend for 31+ years. When analyzing the 5 year stock history and pairing that up with the dividend yield, the average yield over that time frame through June 28th = 2.58%. This is still a tad higher compared to today’s yield of 2.36%, with a potential October dividend increase to bring it back up to it’s previous long-term average. The 3 year dividend growth rate is approximately 7.26%, so for simple math purposes, if Aflac increases their dividend 7.26% this year and goes from $0.37 a quarter to $0.40, this would make the yield of $1.6/$62.72 = 2.55% aka pretty damn close to the historical 5 year average, funny how that works in a way, right? The pros here: Aflac has increased for 31+ years and has an “in the middle” dividend growth record of 7%+, our friend Dividend Mantra would call this a Stage 2 stock, which I would agree with. Given the history = check in the box.
Price to Earnings (P/E) Ratio: Current share price at the end of Friday’s close = $62.72. Q1 filed SEC 10Q return shows a diluted earnings per share of $1.60 this quarter. The income has tracked slower than the Q1 of 2013, primarily due to lack of growth in Japan, but also a battling currency translation, as US sales were actually up compared to a year ago quarter. From review of the balance sheet – total assets were up with policy liabilities decreasing. Given the $1.60 of earnings for the Q, one can annualize this to reach $6.40 diluted EPS for the year. With Aflac currently trading at $62.72, the P/E looks something like this: 62.72/6.40 = 9.80. Which wow! That is extremely low for a company in today’s market, and is around half of what the S&P 500 market as a whole stands. Easy check in the box for this metric.
Dividend Yield: Again, we like to see the dividend yield above the S&P 500 as a whole, which currently is at 1.85%. Therefore, Aflac is far above this by 51 basis points. Aflac has increased their dividend every year for 31+ years, and there is 100% confidence they will do it again this year and be more near the 2.55% yield as I stated earlier in the first section above. That provides around 70bp higher than the index, which when you invest $1000 into each = an extra $7 of income generation (when using the 2.55%). I know that doesn’t seem like a lot now, but that will continue to grow and compound. I’d say a check in this box here.
Payout Ratio: iven the $1.60 of earnings for the Q, one can annualize this to reach $6.40 diluted EPS for the year. With Aflac currently paying a $0.37/dividend per quarter, one can annualize that out to $1.48. Thus, the P/E on annualized Q1 earnings = $1.48/$6.40 = 23%. This is extremely low, which gives us plenty of secureness that the dividend has the ability to increase year after year, with Aflac possibly even being able to afford much larger increases if they so wanted to. Given that they are far, far less than 60% (I actually would like to see closer to the 35-40%), easy check here.
Conclusion: Obviously a very interesting standpoint where Aflac stands. Historically they aren’t over where there dividend yield on average is over the last 5 years, being around 20 bps lower, Aflac would have to drop to $57.81 to reach the 5 year dividend yield average on today’s current dividend, which would be a 7.8% decrease to the stock price. However, one can rest their head on this: Dividend yield is higher than the index, payout ratio is absurdly low with ample room for increases, the P/E is crazy low and they have increased their dividend for 31+ years, with an estimated October 2014 increase this year. It may not be bad for those looking to initiate a position in an insurance company and given a further decline slide, to potential scoop a little more up. Given there is approximately 45-50 days until the next ex-dividend date, I will monitor the price fluctuation of this stock and if it slides a dollar or two more, may add more to my current position.
Does anyone own AFL? Anyone looking at them/have them on their watch list? Entry points needed? Thanks for stopping by, comments are greatly appreciated!
-Lanny