Dividend Aristocrat in Focus: Aflac (AFL)

The Dividend Aristocrats are a select group of currently 57 S&P 500 stocks with 25+ years of consecutive dividend increases. These 57 are large, US companies that have historically provided (slightly) better performance and (slightly) lower volatility than the S&P 500 as a whole.

S&P 500 applies the following criteria to construct the Dividend Aristocrats list:

• must be members of the S&P 500
• must have increased dividends every year for at least 25 consecutive years
• Market Cap at least USD 3 billion
• Liquidity at least USD 5 million (average daily value traded)
• Diversification, at least 40 constituents and no sector allocation above 30%

Read more about the dividend aristocrats’ performance or check-out the European dividend aristocrats.

There are currently 66 Dividend Aristocrats. You can download an Excel spreadsheet of all 66 (with metrics) for FREE by joining our newsletter:

 

This “in focus article” will discuss several aspects of the Aflac (AFL) and why the stock could be attractive for income investors based on our Dividend Score. Our Dividend Score System takes into account several fundamental and technical metrics that affect a company’s ability to continue paying dividends and its overall return.

 

Aflac (AFL) overview

 

	Dividend Score
	64
Dividend	Dividend Yield	DGR 3 years
1.07	2.02%	6.0%

Data: December 9th, 2019

Business model and growth perspective

Founded in 1955, Aflac (American Family Life Assurance Company of Columbus) provides voluntary supplemental health and life insurance products to about 53 million global customers. Aflac has a wide range of product offerings, such as accident, short-term disability, critical illness, hospital indemnity, dental,  and life insurance. The company operates through two segments, Aflac Japan (70% sales) and Aflac U.S (30% sales). Given this sales split, investors are exposed to currency risk. Meaning that Aflac’s earnings will fluctuate, based on exchange rates between the Japanese yen and the U.S. dollar.

In Japan, Aflac made a strategic shift to third sector products, e.g. Medical, Cancer and Income support insurance, given Japan’s low interest rate environment. The earnings in Japan are stable and consistent since 2014.

Total revenues were $5.5 billion during the third quarter of 2019, compared with $5.6 billion in the third quarter of 2018, and $1.16 in adjusted earnings-per-share, which is a 12.6% year-over-year improvement. For the first nine months of 2019, Aflac has generated $16.7 billion in revenue, a 0.4% increase, and $2.6 billion in earnings ($3.41 per share) compared to $2.4 billion ($3.15 per share) in the first three quarters of 2018. (see Q3-2019 press release) For the first nine months, the average exchange rate was 109.16, or 0.3% stronger than the rate of 109.54 a year ago.

The outlook for the adjusted eps has been increased from a range of $4.10 to $4.30 to a higher range of $4.35 to $4.45.

 

Dividend history and dividend growth

It is important that companies that can maintain or even increase their dividend payments in bad times. This is an indication that the company has a strong market position in a stable business that performs well throughout the economic cycle.

Aflac has raised its dividend already for 37 consecutive years. The company increased its dividend very consistently in the past with an annual dividend growth rate of around 9%.

Aflac declared a quarterly dividend of  $0.27/share. The last dividend increase of 3.8% was in February 2019,  from a prior dividend of $0.26.

Dividend Yield

AFLAC Inc current dividend yield of 2.02% is -18% below its 5-year average. The 5-year average dividend yield is 2.46% (see red-line in the chart). This indicates the stock looks overvalued today.

The dividend payments are very well covered by its earnings, given the current payout ratio of 24%. According to analysts, AFL’s payout ratio over the next year is expected to be 25%.

Stable cash flow

Without stable cash flow, it is almost impossible to maintain the dividend in times of a downturn. Operating free cash flow and free cash flow are 2 important metrics for a dividend stock. Aflac has generated positive free cash flow in 10 of the last 10 years, which is a confirmation that the company is able to manage its currency risks.

Low debt ratio

Companies with a low debt ratio have the option of maintaining or even increasing the dividend even during recessions. The (net) debt-to-EBITDA ratio is a great metric to include. AFL’s net debt-to-EBITDA ratio is at a very healthy level of 1.06 (the lower, the better).  Net debt/EBITDA ratio values below 2.5 are acceptable for insurance companies.

Valuation

AFL’s forward P/E ratio of 12.2 is well above its 5-year average of 11.1. Meaning that, the AFL stock looks pricey compared to how the market has valued it in recent years.

Recession performance

Price-performance

Year-to-date AFL is trading up 19.7%, which is in line with the S&P 500 performance.

The 10-year geometric annual performance is 7.2% annually. Looking at the win-ratio of 80% and a loss ratio of 2.8, those two values are average for this stock. The diagram below shows clearly that investors needed several years to recover from the negative performance during the financial crisis.

AFL’s performance triangle.

 

Final Thoughts

Based on the low payout ratio and future earnings growth, Aflac should be a source of safe and growing dividends for years to come. Aflac is a high-quality company, with a profitable business and a strong brand, but does have a large currency exposure to Japan.

The stock is currently overvalued (PE-ratio), we do not consider this company as a buy for risk-averse dividend investors. The stock should first return to its 5-years pe-ratio levels, which is around 11.