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Stock Analysis: Aflac (AFL)

Aflac Incorporated, through its subsidiary, American Family Life Assurance Company of Columbus (Aflac), provides supplemental health and life insurance in the USA and Japan. The company is member the S&P Dividend Aristocrats index.
Aflac has consistently increased dividends for 27 consecutive years. The company announced a 16.70% dividend raise in October 2008.

Between June of 1999 up until June 2009 this dividend growth stock has delivered an average total return of 3.90% annually. The stock fell from its all time high of $68.81 in 2008 to a multi-year low of $10.83 in March 2009, before recovering by 300% off its lows.

The company has managed to deliver a 10.80% average annual increase in its EPS between 1999 and 2008. Aflac is expected to earn $4.70 share in FY 2009, followed by $5.15/share in FY 2010. The company generates over 70% of its revenues in Japan. New distribution channels in the country for Aflac’s supplemental health and life insurance plans, which are not covered by Japanese healthcare, would drive sales in the future. The brand recognition that the company is building in the US should also be a strong driver of growth over time, in addition to focusing on retirement services targeting the baby boomers.

The Return on Equity has ranged over the past decade between a low of 12% and a high of 19%. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

Annual dividends have increased by an average of 22.90 % annually since 1999, which is higher than the growth in EPS. The disparity is mostly due to a gradual increase in the dividend payout ratio and the amounts this insurer has spent on stock buybacks.
A 23 % growth in dividends translates into the dividend payment doubling almost every three years. If we look at historical data, going as far back as 1986, Aflac has actually managed to double its dividend payment every four and a half years on average.

The dividend payout ratio has increased rather sharply over the past two years, but is still much lower than my 50% threshold. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently Aflac is trading at 16 times 2008 earnings, yields 2.70% and has an adequately covered dividend payment. I would be looking forward to adding to my position in Aflac (AFL) on dips below $37.30.

Full Disclosure: Long AFL

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