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AFLAC Incorporated (AFL) Is Even More Attractive After Earnings

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AFLAC Incorporated (NYSE:AFL) is one of only 2 insurance stocks in the Dividend Aristocrats Index. The company is the global leader in cancer insurance, and has paid increasing dividends for 33 consecutive years.

Before we dig into AFLAC”s latest earnings, let’s look at how the stock has been traded by world-class investors of late. 24 funds tracked by Insider Monkey were long AFLAC on December 31, owning $614.71 million worth of the company’s shares, which amounted to 2.40% of its float. During the first quarter we’ve seen eight funds within the Insider Monkey database take up new positions in the stock, while six cut ties with former AFLAC holdings. Harris Associates owns a $459.57 million AFLAC position as of March 31.

On April 26, AFLAC reported strong first quarter 2016 financial results, which beat earnings-per-share expectations by $0.10 (6.1%). Total revenue increased 4.3% year over year to $5.45 billion due to a stronger yen-dollar exchange rate. Revenues also surpassed consensus estimate of $5.23 billion.

Aflac showed earnings per share surprise in its three last quarters after missing estimates in the previous quarter, as shown in the table below.

AFL Earnings Surprise

Data: Yahoo Finance

Aflac, the largest provider of individual insurance in Japan and the leading provider of voluntary insurance at the worksite in the United States, has its primary business is in Japan.In fact, about 70% of the company’s total revenues in the last quarter came from Japan.

As such, Aflac’s financial results depend heavily on the yen-dollar exchange rate. The latest trend of the stronger yen is favoring the company’s revenues and earnings in dollar terms. Aflac Japan’s yen-denominated income statement is translated from yen into dollars using an average exchange rate for the reporting period. The average yen-dollar exchange rate in the first quarter of 2016 was 115.35, or 3.30% stronger than the average rate of 119.16 in the first quarter of 2015. Moreover, The average yen-dollar exchange rate thus far in the current quarter is 108.99, or 5.84% stronger than the average rate of the previous quarter.

As such, we can expect higher revenues and earnings in the current quarter due to the even greater strengthening of the yen in the current quarter.

Yen Dollar Exchange Rate

* Thus far in Q2’2016

USD JPY

Chart: TradeStation Group, Inc.

Commenting on the company’s first quarter results, Chairman and Chief Executive Officer Daniel P. Amos stated:

We are pleased with our overall financial results in the first quarter of 2016. Aflac Japan, our largest earnings contributor, generated solid financial results in yen terms for the quarter. Sales of first sector products were elevated in the quarter, consistent with our expectations. As we further implement various measures later in the quarter, we expect to see a sharp decline in first sector sales in the second half of the year. Although sales of Aflac Japan’s third sector products were up 1.0% in the quarter, you’ll recall we communicated in February that we anticipate sales of third sector products will be down mid-single digits for the full year following very robust production results in 2015. While it’s early in the year, we are running ahead of expectations for sales of third sector products as of the end of the first quarter. We continue to believe the long-term compound annual growth rate for third sector products will be in the range of 4% to 6%.

In the first quarter, Aflac U.S. produced solid financial and sales results. We continue to believe that the changes we made to our career and broker management infrastructure have created a foundation for greater long-term growth opportunities. The increase in new annualized premium sales of 3.7% establishes a solid baseline for our expectation of a 3% to 5% growth rate for the U.S. in 2016. Keep in mind, we anticipate the achievement of our annual U.S. sales target will be increasingly reliant on fourth quarter production.

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