Justin Ford
When it comes to producing iconic ads, few are as recognizable as those produced by Aflac (NYSE:AFL). The somewhat annoying duck yelling “Aflac” has made frequent appearances across American media since 2000. The company is one of the leading insurance providers in the US and Japanese markets. In the US, Aflac primarily offers supplemental insurance for serious accidents or illnesses, while in Japan, the company provides cancer and medical insurance policies.
As an insurance company, Aflac relies on float. This is the time period between the day a customer takes out a policy and that customer files a claim and requires a payout. There are millions of customers paying for Aflac insurance, and the premiums they pay build up. The company can invest that money until it is needed, or it can pile up the cash it receives. Warren Buffett is a well-known investor who really likes the concept of float, as it allows investors to make money on other people’s money (i.e., premiums) until there is a claim. Many people will pay for insurance from Aflac for months or years and then let their policies lapse. That money stays with the company, and Aflac can then invest it for profit. The profit model is clear, and for many income-focused investors, AFL could be a solid addition to a portfolio.
Aflac Finances
AFL has been one of the more profitable companies for investors over the past several decades, although this is not necessarily a sign of future success. Seeking Alpha’s research tools basically go back 30 years, and over that time frame, the price of a share of Aflac has grown by nearly 3,700%, from about $2.26 on a split-adjusted basis to the present price of nearly $83.
While revenue has declined a bit over the past five years ($21.8 billion to $19.2 billion), partially because of foreign exchange rates with Japan, both operating and net income have grown fairly substantially over the same period. A positive sign was in increased year-over-year revenue growth from $4.7 billion to $5.0 billion in the third quarter of 2023. Aflac has been active in creating new products for the market, especially in Japan, with the WINGS Cancer Policy and the EVER Simple Medical policies launching within the past couple of years.
In both Japan and the US, the most recent quarterly report showed strong growth in new sales, showing 16.6% and 6.4% growth, respectively, in those markets. Over the last several years, Aflac has shown strong profit margins. Indeed, the last annual report showed $4.2 billion in net income vs. $19.5 in total revenue. As of the last annual report, AFL had insurance-related liabilities of $86.1 billion, which is actually down more than $20 billion over the past three years, and nearly $7.3 billion of long-term debt, which has also come down in recent years.
As of the most recent quarterly report, Aflac had $5.5 billion cash and cash equivalents on hand, and if recent history is any indicator, that cash should continue to roll in. Nearly 80% of those with policies in the United States continue paying their premiums over a 12-month period; that number exceeds 90% in Japan. Again, Aflac keeps the premiums of those who do not file a claim, regardless of whether they let those policies lapse. There is much to like about Aflac’s financial standing.
Shareholder Returns
I am an investor who is looking to replace much of my working income with passive income, and dividends are an important factor in this regard. Aflac might not make many investors’ dividend screening criteria, especially if they’re looking for immediate income. However, a low initial dividend rate is not necessarily a bad thing if the dividend shows signs of rapid growth. AFL fits this scenario.
The company has increased its dividend for 41 consecutive years. The increase for 2023 was a bit lower than it had been in recent years, coming in at only 5%. Over the past five years, the average increase has been slightly more than 10%. Dividend increases are frequently a sign of optimism on the part of a company. Therefore a 5% increase from 2022 to 2023 might seem like Aflac was concerned with future growth. However, the most recent dividend increase, announced in November for the March 2024 payout, amounted to 19% while growing from $0.42 per quarter per share to $0.50. This per share payout has nearly doubled since the company split its shares in 2018.
This is probably not the most important factor when looking at the company’s dividend, nor is the 2.42% yield, which, while not high, still exceeds that of the S&P 500. The most impressive factor related to the dividend is the fact that the payout ratio is still only 26.52% despite 41 years of dividend growth that frequently exceeds 10% on an annualized basis.
One major factor in the ability to continue with this dividend growth is a robust buyback program. AFL has about 20% fewer shares on the market today when compared to what it had five years ago. In just the third quarter of 2023, the company bought back 9.4 million shares at a cost of $700 million. The most recent share repurchase program still allows the company to buy an additional 86.4 million shares. Fewer shares means a lower dividend payment. For example, a dividend of $10 on 20 shares would be $200, while the same dividend on 10 shares would cost a company $100.
Buybacks can also help with earnings per share, as a similar net income would be spread across fewer shares. Share buybacks do not have the same tax impact on investors, as they can decide when to take gains and pay taxes. Qualified dividends are taxed at the capital gains rate, but they are taxed when distributed. Both are returns for shareholders, and they make Aflac a very interesting investment.
Conclusion
There is much to like about Aflac. Even with the price at nearly $83 per share, the P/E ratio is still around 11. It has been lower at times over the past 10 years, but it’s also been higher. The company has a solid and proven business model, and it’s been paying a rapidly growing dividend since the Reagan administration. A low current dividend could turn into a high yield on cost in just a few short years if historical dividend growth rates can continue. Additionally, the rapid buyback of shares can lead to higher overall returns as EPS growth leads to share price growth. For these reasons, Aflac is a stock for dividend-focused investors to consider. Those looking for total returns could also benefit from an investment in AFL. There’s a lot to like.
