Dividend Aristocrats in Focus Part 12: AFLAC Incorporated (AFL)

Valuation & Expected Total Returns

Aflac stock presents a compelling opportunity for value and dividend growth investors. Aflac stock trades for a price-to-earnings ratio of 10.6. This is significantly below the average price-to-earnings ratio in the S&P 500, which is 25.

Prior to the Great Recession, Aflac stock traded at a price-to-earnings multiple of around 0.9x the S&P 500’s price-to-earnings multiple.  This implies a fair price-to-earnings ratio of around 22.5 for Aflac – more than double its current price-to-earnings ratio. As a result, Aflac is significantly undervalued.

I don’t think Aflac necessarily deserves a price-to-earnings ratio of 22.5.  What I do think is that the company is a bargain in today’ low interest rate environment.  Also, Aflac will likely see its earnings rise if (when) interest rates rise, unlike most dividend stocks.

Combined with Aflac’s future dividend payments, investors will likely see either high single digit or low double digit total returns.  The company’s total returns will come from its 2.4% dividend yield, along with earnings-per-share growth.  Earnings-per-share growth will come from both organic growth and share repurchases.  Aflac has reduced its share count by over 3% a year over the last several years.

The company’s dividend yield and share repurchases alone give investors a shareholder yield of over 5%.

Final Thoughts

Aflac is a blue-chip industry leader. It has a highly profitable business model, with several growth catalysts for the future.

Management is committed to rewarding shareholders with cash returns. Its cheap valuation will allow Aflac to buy back stock at very attractive prices, which will boost future earnings growth even more.

Aflac stock is a compelling hold for value investors and dividend growth investors.  It is a buy for investors looking for more exposure to the insurance industry.  The company ranks well using The 8 Rules of Dividend Investing thanks to its low payout ratio, low price-to-earnings ratio, and solid growth prospects.

Note: This article is written by Bob Ciura and was originally published at Sure Dividend.

Additional Links:

(1) http://www.suredividend.com/shelby-davis?utm_source=bc&utm_medium=sd&utm_campaign=102216sd

(2) http://quoteaddicts.com/topic/aflac-duck-quotes/

(3) http://investors.aflac.com/~/media/Files/A/Aflac-IR/financial-reporting/annual-reports/ar2015.pdf