Obamacare offers a 40% upside for Aflac

There's a lot more to this company than clever marketing. Here's why there's a huge opportunity opening up in its home market.

By StreetAuthority Feb 26, 2014 10:15AM
Image: Insurance © NULL/CorbisBy Adam Fischbaum                                    
                      
The Aflac (AFL) duck is one of the strongest brands today. It's ingenious marketing.

But there's much more to this behemoth than a clever and enduring ad campaign. The stock is a must-own.                                                   
I first wrote about Aflac for StreetAuthority three years ago. The stock is higher than when I first profiled it, and the earnings projections are right about where I put them (give or take a few cents).

Yet the market is still not that crazy about the stock. Good -- that means better prices for us.

With a market cap of close to $30 billion, Aflac sells supplemental health and life insurance in the U.S. and Japan. Most products are underwritten on an individual basis, but the company began writing group policies in recent years.

In the U.S., Aflac's product focus is primarily asset and income loss due to illness or injury. In Japan, the company's focus is on designing products designed to help pay medical costs not covered under Japan's national health insurance system. This is where I see the most opportunity for growth in the U.S. business. But more on that later.

Aflac's financial position is probably the best insurance for investor success. The balance sheet and earnings track record are nothing short of impressive.

Annual revenue has increased at an average annual rate of about 9 percent over the past five years, from $16.6 billion in 2008 to $23.9 billion in 2013. Earnings per share (EPS) enjoyed an annual growth rate of 31 percent over the same period, from $2.62 in 2008 to $6.76 in 2013.

Even stronger are the company's historical return on equity of 20 percent, extremely low long-term debt-to-capital of 13 percent, and modest dividend payout ratio of just 21 percent. Speaking of dividends, Aflac has raised the dividend on its common shares for 29 years straight and recently announced a program to buy back $1 billion of its common stock this year.

Yet AFL is still relatively cheap, with a forward price-to-earnings (P/E) ratio of 9.5. Why?

More than three quarters of Aflac's revenue comes from Japan. It may be hard to believe that a little old supplemental insurance company founded in Columbus, Ga., would derive that much revenue from overseas -- but it does help explain the stock's lackluster performance.

The Japanese yen has weakened significantly against the dollar, subjecting Aflac's revenue from that country to detrimental exchange-rate fluctuations. Throw in the perpetually sluggish Japanese economy and the recovery from the Fukishima disaster, and it's hard to get excited about a company that derives 77 percent of its revenue from Japan. However, I think Aflac's success in Japan can be replicated in the U.S.

As I mentioned, Aflac's niche in Japan is offering insurance products that help pay for costs not reimbursed by the country's national health care plan. The same applies in the U.S., where the Affordable Care Act (aka Obamacare) may leave gaps in the health coverage of millions of Americans. Aflac is poised to fill those gaps.

In the U.S., Aflac has a distribution network of more than 76,000 independent licensed sales associates and brokers. The company is invested heavily in training and recruiting a more professional sales force.

Product design is also evolving. Aflac's flagship cancer insurance policies have incorporated several new benefits that focus on wellness and initial diagnosis that were previously offered as riders. Aflac has also rolled out dental/vision plans as well as group plans.

Aflac's traditional market -- small businesses and their employees -- may be the most affected by the fallout of Obamacare. Until recently, Aflac was seen in the U.S. primarily as an income replacement insurance provider ("What if you're hurt and can't work?"). The company is poised take advantage of its strong market position and gain further wallet share as a "comprehensive safety net" for health and well-being.

Recently, I looked at the almost bondlike qualities of Cisco Systems (CSCO), and Aflac has many of the same traits: low valuation, a strong brand, and steady, predictable results. However, one main difference is the above-average growth opportunity for the company's U.S. supplemental insurance business.

Risks to consider: Besides the currency risk associated with the company's Japanese business, the biggest risk Aflac faces domestically are the hangover from the financial crisis of 2008 and a lackluster U.S. job recovery. To combat these risks, the company has simplified many of its products and added features to enhance customer retention.

Action to take: AFL currently trades near $63 with a dividend yield of 2.3 percent. Based on Aflac's history and prudent management, I'm setting a 12- to 18-month price target of $81. Including the dividend, that would be a total return of 31 percent.

More from StreetAuthority

178Comments
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The Obamacare analogy goes something like this:  There is a boat in the middle of lake Michigan filled with people.  In this boat is a small leak, not big, but enough to cause a slight concern yet still manageable.  Obama comes along and says, "I can fix that leak with my water-letter-outer", "wow", say the people, "ok, have at it".  So Obama takes his water-letter-outer, which looks very similar to an old-time, non-electric, hand drill and starts drilling holes in the bottom of the boat in an attempt to let out the small amount of water.  Unbeknownst to him he caused more water to enter the boat, but being blind to his own ignorance and arrogance he starts drilling more holes thinking that will fix the problem not realizing that HE IS THE PROBLEM.  The boat eventually sinks, and all die.
Feb 26, 2014 5:05PM
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Obamacare-

 

The biggest lie ever told, the biggest bag of Sh!t ever sold--

 

Bloodbath in November-- Vote the Dumbocrats out!!

 

REPEAL in December!!

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Detroit - the future of America, brought to you by the Democratic party.
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You just might be a Democrat if you sign your checks on the back instead of the front.
Feb 26, 2014 7:22PM
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"A State with No Republicans!"

Very interesting... Makes ya wanna move there, doesn't it? (Not!) A wonderful state with zero Republicans - The State of Illinois.

Some interesting data on the 'state' of Illinois.... There are more people on welfare in Illinois than there are people working. Chicago pays the highest wages to teachers than anywhere else in the U.S. Averaging $110,000/year. Their pensions average 80-90% of their income. Wow, are Illinois and Chicago great or what? Be sure to read till the end. I've never heard it explained better. Perhaps the U.S. should pull out of Chicago? Body count: In the last six months,

292 killed (murdered) in Chicago.... 221 killed in Iraq; AND Chicago has one of the strictest gun laws in the entire US.

Here's the Chicago chain of command: President: Barack Hussein Obama · Senator: Dick Durbin · House Representative: Jesse Jackson Jr. · Governor: Pat Quinn · House leader: Mike Madigan · Atty. Gen.: Lisa Madigan (daughter of Mike) · Mayor: Rohm Emanuel · The leadership in Illinois - all Democrats. · Thank you for the combat zone in Chicago.. · Of course, they're all blaming each other. · Can't blame Republicans; there aren't any! · Chicago school system rated one of the worst in the country. Can't blame Republicans; there aren't any

State pension fund $78 Billion in debt, worst in country. Can't blame Republicans; there aren't any!

Cook County (Chicago ) sales tax 10.25% highest in country. Can't blame Republicans; there aren't any!

This is the political culture that Obama comes from in Illinois. And he is going to 'fix' Washington politics for us?

George Ryan is no longer Governor, he is in prison. He was replaced by Rob Blagoyavic who is, that's right, also in prison.

And Representative Jesse Jackson Jr. resigned a couple of weeks ago, because he is fighting to not be sent to... that's right, prison.

The Land of Lincoln, where our governors make our license plates. What?

As long as they keep providing entitlements to the population of Chicago, nothing is going to change, except the state will go broke before the country does.

"Anybody who thinks he can be happy and prosperous by letting the Government take care of him better take a closer look at the American Indian."

Don’t forget Detroit, another good example…


Feb 26, 2014 5:43PM
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If you look in my wallet you'll see EXACTLY why I hate Obamacare and won't be voting for any more democrats anytime soon.
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Only a Democrat would think that they still have money left in their bank accounts simply because they still have checks left over.

 

"what do you mean I have no money, I still have checks left"?

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Slot machines are a lot like this administration, you keep putting money into it, never really see where the money is going, hope for it to change your life for the better, hear a lot of racket going on, see that things inside are doing nothing more than spinning in circles going nowhere, realize that the money you put in usually goes to someone else, and get very little back for what you put in.
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What is analogous with Democrat????  Just about everything having to do with money mismanagement, just look at Detroit.
Feb 26, 2014 5:32PM
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If you got a game someone will game it! Obama has gamed America and millions with better ideas allowed him to do it, some even gave him aid.... I say shame on them. Obama is a big laughing, lying, bone headed, big eared liar.
Feb 26, 2014 5:24PM
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Buck OfamaCare and the duck it flew in on.
Feb 26, 2014 5:20PM
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Pay your Aflac premiums for years to get nothing in return. The perfect business model!!!
Feb 26, 2014 4:54PM
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wonder which of the politicians thought this out a few years ago and have stock .. OH well, think I will keep my hopes up and maybe the next posted opinion will be on an article about the demise of Obama care ..
Feb 26, 2014 5:36PM
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You don't have to pay for insurance, simply pay the penalty, but those who have continued to pay are tired of paying for those who don't.  As for " the draft", it hasn't been around since the 1970's.  You see, all of our "hero's" are volunteer!  That's right, they volunteer to get their **** shot at to protect our "Constitution" which, among other things,  provides for "freedom of speech"  which you seem to like very much.  You don't sound like you've earned anything the hard way, and if we do go to war with China, (can't think of a reason why)  I'll be watching to see if you're the first to register for the draft. Seriously, I doubt if our hi-tech military will take an idiot like you!  Most people like you gripe about China, but can hardly wait to run to Walmart to buy it.  If you want to destroy China silently, STOP buying their stuff and invest in the American worker.

Feb 26, 2014 5:18PM
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The Aflac Duck needs to grow some big ole Obama dumbo ears and go quack quack up everyone's woozoo.
Feb 26, 2014 5:35PM
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AFLAC is run by a duck...what do you expect?
Feb 26, 2014 12:16PM
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OMG, that's funny Hairy...


I like that duck, I think it would look better turning on a BBQ spit....

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That's simple, because Aflac will make money hand-over-fist, duh!
Feb 26, 2014 5:12PM
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good luck getting your money from them
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