They say two things in life are guaranteed: death and taxes.
I’d like to add one more to the list.
Think about it.
Who doesn’t have insurance of some type?
After all, think of all the things you have to insure: your home, car, life, and health.
And that’s just scratching the surface, right?
This document compiles and tracks more than 800 US-listed stocks that have increased their dividends for at least the last five consecutive years.
And one insurance company has one of the lengthiest dividend growth records in its entire industry.
This is one of the world’s most well-known insurance providers.
And they just so happen to have an emphatic mascot on their side.
Aflac Incorporated (AFL) is a holding company that, through its subsidiaries, provides supplemental health and life insurance policies in the US and Japan.
I’ve discussed my affinity for insurance companies many times now.
Prudent underwriting results in plenty of profit all by itself, by making sure the premiums collected are larger in aggregate than the claims paid out.
However, another big source of profit and growth (oftentimes a bigger source than the underwriting side of the business) for an insurance company is in the float.
The float is basically premium income that’s collected and held until a later date, at which time premiums are paid. This interim period, however, provides an insurance company time to capitalize on this capital, collecting low-risk returns on clients’ money.
It’s really a fantastic business model, if run correctly and conservatively.
Aflac operates in two markets: Japan and the US.
Perhaps surprisingly, Aflac actually does the majority of their business in Japan. Their Japan operations accounted for 71% of total revenue for fiscal year 2016.
The company primarily markets its policies through the workplace, as they aggressively promote their insurance as covering gaps in coverage and picking up much of the out-of-pocket costs that most insurance plans charge. Their focus on the supplemental market has allowed them to become the #1 provider by market share of supplemental health and life insurance.
This focus and market share has led to pretty impressive growth, which we’ll now take a look at. Their fiscal year ends December 31.
Revenue grew from $15.393 billion in FY 2007 to $22.559 billion at the end of FY 2016. That’s a compound annual growth rate of 4.34%.
That’s right in line with what I’d expect from a fairly mature insurance company. In fact, it’s actually better top-line growth than what a lot of other insurers have managed over the last decade, especially in P&C.
Earnings per share increased from $3.31 to $6.42 during this period, which is a CAGR of 7.64%.
That’s very solid bottom-line growth, which was helped along by a buyback program that saw the company reduce its outstanding share count by ~16% over the past decade.
CFRA is predicting that Aflac will be able to compound its EPS at an annual rate of 2% over the next three years, hampered by increasing competition and pricing pressure.
However, recent US tax reform (which will affect part of Aflac’s business) and rising interest rates (because of the aforementioned float) should serve as long-term tailwinds.
But what about the dividend? We’re here to talk about the dividend, right?
Well, they’ve increased their dividend to shareholders for the last 35 consecutive years.
That’s one of the best records in the insurance space.
Over the last ten years, the company has increased the dividend by an annual rate of 8.1%.
Meanwhile, the stock yields 1.98% right now, which is about 30 basis points below the stock’s own five-year average. However, that yield is roughly in line with the broader market.
The payout ratio is low, at just 26.2%.
So there’s plenty of room for more dividend increases here.
The future looks very bright here for investors expecting, and/or needing, plenty of ongoing dividend growth.
The company’s balance sheet is conservatively managed, which is appropriate considering their industry. They are, after all, in the business of managing/taking on risk.
The long-term debt/equity ratio is 0.26, while the interest coverage ratio is over 16.
The credit ratings are A+/Aa3.
These are very good numbers.
Profitability is robust.
The company averaged annual net margin of 12.28% over the last five years, while return on equity averaged 17.19% per year over that time frame.
So I mentioned the float earlier.
Well, the float is in full action here at Aflac.
They manage a portfolio worth over $100 billion, which is extremely sizable.
And they manage it fairly conservatively – the majority of it is invested in bonds (with heavy exposure to Japanese national debt).
This can unfortunately lead to low returns in a low-rate environment, but it also keeps risk fairly low. Aflac is more interested in capital preservation than massive returns.
But as interest rates start to rise (as they are now), this will provide a nice tailwind to the company, as the investment portfolio will slowly, but surely, start to generate more investment income.
The company provides coverage to more than 50 million people worldwide. This gives them incredible scale and the high likelihood of recurring and stable revenue for lengthy periods of time.
And what’s wonderful about Aflac’s coverage is that they provide cash in the time of need. Clients can make claims against their Aflac policy(ies) for a covered event, and Aflac reimburses the customer for any covered and applicable out-of-pocket costs. So that’s a tangible benefit that clients can actually see.
As you can see, via my real-life and real-money dividend growth stock portfolio, I’m a shareholder in the company.
There are risks, however, that one should carefully consider.
The Affordable Care Act continues to provide a challenging environment in the US.
In addition, there could be lasting health effects due to the Fukushima disaster in Japan, and that could cause a spike in claims many years from now. This may disproportionately affect Aflac due to a combination of heavy exposure to Japan and unique insurance products (including cancer plans).
Furthermore, the low-rate environment means Aflac’s investment portfolio returns are subdued right now.
Looking at the valuation, shares trade hands for a P/E ratio of 13.2.
That’s about half of what the broader market trades at, but it’s also significantly higher than the stock’s own five-year average P/E ratio.
While one could argue the stock was simply undervalued at least some of the time over the last five years, the valuation may have overshot in the other direction (leading to overvaluation).
I valued shares using a dividend discount model analysis, with a 10% discount rate and a 7% long-term dividend growth rate.
That DGR is below Aflac’s long-term dividend and EPS growth, but dividend increases have been much smaller over the last five years. In addition, the forecast for near-term EPS growth is tepid. Rising interest rates may very well reverse this trend, which is why I’m modeling in growth that blends both the long-term and near-term numbers.
The DDM analysis gives me a fair value of $64.20.
Bottom line: Aflac Incorporated (AFL) has been selling supplemental insurance for over 60 years now, and the company insures more than 50 million people. This substantial client base has allowed them to leverage a float into an investment portfolio worth over $100 billion. Their 35-year streak of increasing dividends is highly unlikely to come to an end anytime soon, seeing as how the payout ratio is very low and the company is growing at a steady, if unimpressive, rate. The stock appears overvalued here, though, which means it may be prudent to wait for a material pullback before considering buying this stock.
— Jason Fieber
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