AFLAC Incorporated (AFL): A Dividend Aristocrat Trading For Less Than 10x Earnings

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AFLAC Incorporated (NYSE:AFL) is a well-known insurance company that has proven to be a very reliable dividend payer over the years. The company has increased its dividend for 33 consecutive years and has plenty of room for continued dividend growth.

AFL Dividend

The insurance business has many attractive characteristics, but AFL’s high exposure to Japan has served as a meaningful headwind over the past few years. The stock currently trades at less than 10x forward earnings, and we hold the stock in our Top 20 Dividend Stocks portfolio.

Among the funds tracked by Insider Monkey, 28 reported long positions in AFLAC Corporation as of the end of September, amassing around 3.10% of the company’s outstanding stock. Ken Griffin’s Citadel Investment Group held around 3.01 million shares, followed by John W. Rogers’ Ariel Investments with a stake of 2.17 million shares

Business Overview

AFL is the number one provider of individual voluntary insurance products at the worksite in the U.S. and protects one in four households in Japan. AFL provides insurance to more than 50 million people worldwide and was founded in 1955.

AFL’s insurance operations generate cash in two ways – policy premiums and investment income. Policy premiums are the company’s primary source of cash flow and are generated from policy renewals and new policies issued.

In Japan, AFL’s key product lines are life insurance and supplemental insurance products such as cancer and medical insurance. In the U.S., AFL’s product line includes income-loss protection (e.g. disability, life), supplemental medical (e.g. dental, vision), and asset-loss protection (e.g. accident, cancer, critical illness). AFL pays cash benefits to policyholders when they get sick or hurt, helping them replace lost income from missed work and asset losses.

AFL also invests its premiums to earn additional income and offer policyholders more competitive premiums and benefits. Investments are matched with AFL’s policy liabilities by both duration and currency.

By geography, AFL generated 72% of its revenue in Japan during 2014. The rest of AFL’s business is in the U.S.

Business Analysis

AFL’s primary competitive advantages are derived from the company’s brand recognition, leading market share, distribution channels, financial strength, and conservative approach to risk management.

The company has operated in the U.S. for 60 years and in Japan for 40 years, building up significant brand equity. Management estimates that about 9 out of 10 people in Japan and the U.S. recognize AFL’s brand. The Aflac Duck was introduced in the U.S. and Japan in 2000 and 2003, respectively, and has further benefited AFL’s recognition.

AFL’s business actions over the years have also positioned the company favorably with consumers. For example, the company introduced its One Day Pay claims initiative in the U.S. in February 2015. One Day Pay focuses on the speed of claims payments and means that AFL processes, approves, and pays a claim in just one day, helping lift policyholders’ financial burden quickly.

Getting cash in the hands of policyholders faster than anyone else is very important because they are experiencing a very difficult time of their life. AFL expects to reach over 2 million people with One Day Pay in 2015 and believes that 70% of its policyholders can use One Day Pay for their claims. Actions like these further build up AFL’s brand reputation.

While many insurance markets are fragmented, large players like AFL have meaningfully advantages over their smaller counterparts. Since insurance products are very similar in nature from one supplier to the next, competitors must try to differentiate on quality of service, brand recognition, and financial strength. We already touched on AFL’s strong brand recognition and service, but the company’s sheer size also plays to its advantage.

AFL has built up a strong reputation and massive distribution networks over many decades. With such a large base of premium policies mostly being renewed each year, AFL has the scale to keep its premiums very competitively priced (AFL is the lowest cost provider in many instances) and offer compelling benefits to policyholders that smaller rivals cannot match.

Beyond scale, channel networks, and brand recognition, AFL’s actuarial expertise is another key advantage. For at least the last 10 years, AFL’s annual cash flow from policy premiums has exceeded the policy benefits the company has paid out. In other words, AFL’s actuaries have done an excellent job assessing and pricing risk accordingly. This keeps AFL’s costs very competitive and frees up more funds to be invested for additional income.

It would take new competitors many years and cost a fortune to replicate AFL’s distribution network, brand strength, and actuarial expertise.

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