2 Numbers That Suggest Opportunity
Whereas Aflac can’t do much about the strength or weakness of the Yen, they can directly affect their balance sheet and investment results. The two ways that insurance companies make money are through collecting premiums and by investing their excess funds to generate returns.
In the last year, AFLAC Incorporated (NYSE:AFL) saw revenues jump by more than 14%, but net investment income only increased 6.06%. In the last year, Aflac’s investment income made up 13.69% of total revenues. By comparison, The Allstate Corporation (NYSE:ALL) and Travelers Companies Inc (NYSE:TRV) generated 12.04% and 11.23% of their revenues from investment income. However, AIG was able to generate nearly 31% of their revenue from investment income. While Aflac’s results look good, it seems like based on AIG’s performance they can do better.
A second metric that suggests Aflac could improve is their debt-to-equity ratio. One of the major issues with Aflac stock during the Great Recession was the company’s exposure to Europe and international debt markets. While the company has mitigated these risks somewhat, investors who dig into balance sheet numbers might see an issue.
Peter Lynch said that one of the most fundamental measures of the strength of a financial institution is the equity-to-assets ratio. In the current quarter, Aflac’s equity-to-assets ratio stands at 12.19. By comparison, each of their peers has a relatively stronger balance sheet. AIG and The Allstate Corporation (NYSE:ALL) have equity-to-assets ratios of 17.86 and 16.21, respectively. The leader in their peer group is Travelers, with an equity-to-assets ratio of 24.21. More equity means more protection from potential losses, either in the insurance business, or from the portfolio. Aflac management should consider the level of assets they acquire relative to their equity base. A higher equity-to-assets ratio might give investors comfort that Aflac can weather the storms that naturally occur in the financial industry.
An Attractive Stock Today Even With These Challenges
If we look at Aflac’s stock versus their competition, at first investors might shy away from the company’s seemingly lackluster 6.5% expected EPS growth rate. However, looking at the bigger picture, the stock is relatively more attractive than its peers.
The PEG+Y ratio takes a company’s yield plus their expected growth rate, and divides by the P/E ratio. This allows investors to compare companies that pay dividends with those that do not. In this case, the higher the number, the better the value. Aflac’s yield of 2.76% and 6.5% growth rate gives a total expected return of 9.26%. This may not sound like a lot, but at just 7.97 times earnings, the PEG+Y ratio is 1.16.
By comparison, AIG’s ratio is a 1.06, and both The Allstate Corporation (NYSE:ALL) and Travelers Companies Inc (NYSE:TRV) score a 1.07. All of Aflac’s peers are expected to grow faster, and some pay similar yields, but they are priced higher, which accounts for this lesser relative value. AFLAC Incorporated (NYSE:AFL) seems to offer a good value, but long-term investors should add AFL to their watchlist and see if this opportunity is all it’s quacked up to be.
The article This Great Company Still Has 3 Ways to Get Better originally appeared on Fool.com and is written by Chad Henage.
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