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AFLAC Incorporated (AFL) Still Has 3 Ways to Get Better: The Allstate Corporation (ALL), Travelers Companies Inc (TRV)

When investors consider a company, it makes sense to look for both strengths and weaknesses. The company’s strengths need to be examined to determine if they are sustainable. On the other hand, if a company has a weakness, this could either be a problem to keep an eye on, or an area for improvement in the future. When I look at a company like AFLAC Incorporated (NYSE:AFL), I see a great organization, but I also know that they can do better.

The Allstate Corporation (NYSE:ALL)

It’s Hard to Duck a Challenge Like This
Domestically, most people know Aflac from their commercials featuring the iconic Aflac duck. However, Aflac’s most important market in terms of revenue and earnings is Japan. The Japanese know Aflac for a lot of things, and most aren’t the duck from the advertisements. In fact, Aflac Japan has a unique competitive advantage, in that 90% of the banks in the country market the company’s products.

Aflac also has several unique products in the country. Specifically, their WAYS product allows policyholders to convert part of their life insurance to medical, nursing care, or a fixed annuity. In Japan, the company saw new product sales increase more than 30%, and premium growth in Yen was more than 11%. Given this strong growth, Aflac should be doing very well right?

Not quite, Aflac’s results are being hurt by the valuation difference between the U.S. dollar and the Yen. Though AFLAC Incorporated (NYSE:AFL) Japan collected 11% more premiums in Yen, when converted to dollars the total was actually down 0.27%. The good news is Aflac is growing, the bad news is it’s being hidden by the strength of the Yen.

What About the Rest of the Company?
Aflac U.S. competes in the very competitive domestic market, with such giants as American International Group Inc (NYSE:AIG), The Allstate Corporation (NYSE:ALL), and Travelers Companies Inc (NYSE:TRV). Each of these companies offer insurance products and services that go head to head with Aflac.

Aflac is trying to move beyond just being known for supplemental insurance, but large insurance brokers are the name of the game stateside. Large insurance brokers prefer to stick to what they know, and Aflac knows that it will take time and perseverance to break into this market. In the current quarter, Aflac made slow progress with total premiums up 5.07%, but new sales growth was just 0.81%. However, with over 76,000 licensed sales associates, Aflac is poised to keep fighting for domestic sales.

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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