Aflac: 5 reasons to buy

Though the insurance company has been facing headwinds, there are long-term reasons for investor optimism.

By TheStockAdvisors Nov 30, 2011 11:16AM
Image: Insurance (© Hemera/age fotostock)By Richard Moroney, Dow Theory Forecasts

Aflac (AFL) ought to be reveling in its own success. As the top seller of cancer and medical insurance products in Japan, Aflac produces predictable cash flows from premiums on these policies.

But the shares have been volatile, reflecting its fight against the currents of Japan’s natural disaster and Europe’s debt crisis.

The company has grown sales 7% and per-share profits 14% over the last year, and expectations are for modest growth in 2012 (8% in sales and 4% in per-share profits).

These expectations seem unduly conservative considering the company’s stellar long-term record. Below, we present five reasons for optimism.

Safer investment portfolio

Years ago, Aflac bought seemingly low-risk bonds in countries now known as the PIIGS (Portugal, Italy, Ireland, Greece, and Spain).

In recent quarters, the company has aggressively curtailed the risk of its investment portfolio, with the overhaul now mostly completed.

Bonds from PIIGS countries now account for 2% of the investment portfolio, down from 6% in January 2008.

Bonds issued by financial institutions comprise 28% of the portfolio, down from 42% in 2008. Just 5% of Aflac’s debt portfolio is rated below investment grade, versus 7% in the year-ago quarter.

Momentum in Japan

In the nine months ended September, Japan accounted for 76% of revenue from premiums and 80% of operating income. Revenue from premiums climbed 17% during the period, helped by currency gains.

New annualized premium sales advanced 5% for cancer policies and more than quadrupled for WAYS, a product that allows policyholders to convert part of their life insurance to medical, nursing-care, or fi xed-annuity benefi ts.

Optimism in the U.S.

Growth at the U.S. unit (24% of revenue, 20% of earnings) has been slower, with premium-related revenue ticking 3% higher so far this year.

But Aflac could be positioning itself for a stronger recovery, with agent recruitment up 11% in 2011. 

Commitment to shareholders

Aflac announced a 10% dividend hike last month, marking the 29th consecutive annual increase. Management has pledged to increase the dividend at least as fast as the company’s earnings grow.

Aflac projects per-share earnings will advance 2% to 5% in 2012 but expects that rate to improve in coming years.

The company also plans to spend about $1.8 billion on share repurchases over the next two years, enough to buy back about 9% of shares at the current price.

Attractive value

At less than seven times trailing earnings, the stock trades 48% be- low its three-year average and 10% below the median for life and health insurers in the S&P 1500 Index.

Based on Wall Street’s 2012 profit target of $6.67 per share, Aflac trades at a 7% discount to its peer group.

While the stock hasn’t fully recovered, it is making headway, rebounding 31% from September lows. We rate Aflac a Long-Term Buy.

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