Today's Buy Opportunity: Aflac

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Insurance companies don't often come to mind when we think of award-winning, humorous, iconoclastic marketing campaigns. Aflac (NYSE: AFL  ) , though, is the exception. The challenge is that this insurance giant is better known for its walking, quacking, frustrated duck mascot than as one of the largest U.S.-based insurance companies. Actually, that's the point of the commercials. Build up name recognition first, company awareness second. And it has worked. Yell out "AFLAAACK!" in the office, and your co-workers will envision the Gilbert Gottfried-voiced white duck they've seen on TV. But they, and perhaps you, may not know the $25 billion company behind that famous bird.

To most of us "AFLAC" is a form of onomatopoeia (a word derived from a specific sound, in this case a duck's quack) rather than an acronym representing the American Family Life Assurance Co. That's OK for Aflac the company, though, seeing that it has now 94% name recognition thanks to its omnipresent duck commercials and sponsorships. This company is worth knowing not just because of its creative marketing campaigns but also because it's an insurance powerhouse that has increased its dividend each year since 1982 (including a 9% increase in August). Few companies can match that performance. And with Aflac's earnings power flying ahead, I don't see that record changing anytime soon. That's good news for shareholders, including The Motley Fool, which soon will be proud owners of shares of this 55-year-old company.

Fast facts on Aflac

Ticker

NYSE: AFL

Stock Price

$51.61

Market Capitalization

$24.3 billion

Industry

Accident & health insurance

Headquarters

Columbus, Ga.

Cash / Debt

$2.3 billion / $2.7 billion

Dividend Yield

2.4%

Source: Capital IQ, a division of Standard & Poor's.

The three Amos brothers founded Aflac after moving to Columbus, Ga., in 1955 because it was the largest Southern town without a dominant insurance company. But Aflac is hardly your typical, stodgy, provincial insurance company. In fact, while its roots run through the Deep South, its business thrives in the Land of the Rising Sun. Aflac generates around 80% of its revenues and most of its profits in Japan, where it is the largest insurance company by policies in force. Insurance is big business in Japan, which has the highest life expectancy in the world, with more than one in five people over the age of 65 (compared to 13% in the U.S.). Here's why I like Aflac for your portfolio:

  1. Long history and deep roots: Aflac may not be known for its insurance business in the states, but in Japan Aflac is a household name because it has been selling insurance policies since the early 1970s. Today, one in four Japanese households has an Aflac insurance policy, many to supplement their national health insurance plans, and the company continues to make inroads in different distribution platforms like banks and companies. Aflac is the largest foreign insurance company by premiums, and it insures employees at 89% of companies listed on the Tokyo Stock Exchange. The average length of Aflac's Japanese policies is 14 years, about double what it writes in the U.S, allowing the company to invest in long-term securities and reap the rewards.
  2. Leads to stout financials and rich cash flows: Aflac's profitable position generates returns on equity of 15% to 20%-plus, meaning for every $100 of shareholders' capital the company earns $15 to $20. Compare this to the ROE's of fellow insurance companies The Travelers (NYSE: TRV  ) at 13% and Allstate (NYSE: ALL  ) at 6%. Chubb (NYSE: CB  ) comes the closest with ROEs around 15%. Aflac's balance sheet carries more than $90 billion in assets, up from $56 billion at the end of 2005. Earnings growth has slowed a bit recently, but the insurance behemoth still earns $1.5 billion to $2 billion each year, and retained earnings have grown more than 11% per year since 2005.
  3. With dividends and share buybacks: Other than marketing and tech investments, Aflac's insurance business requires little reinvestment, meaning plenty of cash leftover for shareholders. Last year, Aflac paid out 35% of its earnings in dividends leaving healthy room for additional increases over time. Management, led by Dan Amos, son of one of the founding brothers, ceased share buybacks during the financial crisis to preserve cash, but announced last month that it will buy up to 12 million shares in 2011 (2.5% of total shares outstanding).
  4. And an attractive stock price: Aflac's stock is up 18% over the last three months, but with $5 in per-share earnings likely this year we're still paying around 10 times earnings for a consistent performer with a leading market position and the financial engine to keep growing. I like Aflac as an investment to nibble at today and add through weakness on your way to a full position in your diversified portfolio. History is on our side here: Over the past one-, three-, five-, and 10-year periods, Aflac's stock has beaten not just the S&P 500 but the SPDR KBW Insurance ETF (NYSE: KIE  ) as well.

One risk to this golden goose
In an effort to match assets with its lengthy insurance policies, Aflac seeks out long-term investments to generate income. These are rare in Japan, so Aflac looks elsewhere, including many European financial preferred securities. During the financial crisis, investors feared that European banks would default on interest payments to Aflac so they slammed the stock. While Aflac astutely navigated that environment, it still carries plenty of European financial investments on its books.

Foolish bottom line
Aflac is a marketing machine that over the past 40 years has become one the largest and most profitable insurance companies in the world, yet at just 10 times earnings expectations the stock sells at a discount to the market. So it's a good time to open a position in this long-term outperforming stock, collect our dividends, and follow the trials and tribulations of a duck that maybe one day will be as famous for its parent company as it is for its witty commercials. Either way, investors should enjoy a bountiful financial feast.

Interested in reading more about Aflac? Add it to My Watchlist, which will find all of our Foolish analysis on this stock.

Previous recommendations (Click here for full list of recommendations and performance):

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Andy Cross is a co-advisor of Motley Fool Hidden Gems and an associate advisor of Motley Fool Stock Advisor. He does not own shares of any company mentioned. Aflac is a Motley Fool Stock Advisor recommendation. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (28)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 24, 2010, at 11:39 AM, TMFOpie wrote:

    Hey Fools,

    Aflac is a $25 billion company so it may not catch too many astute investors by surprise, but it still can be a fine stalwart for your portfolio with its dividends, share buybacks and stock potential. Hope you enjoy the write-up and have a nice weekend.

    Andy (TMF Opie)

  • Report this Comment On September 25, 2010, at 2:38 PM, 11x wrote:

    AFL is a fine company indeed but I prefer PGR instead. You should look at them, they have similar favorable metrics (high ROE, share buybacks, efficient well run company) but have had higher growth over the years. For this reason I prefer PGR but AFL would make a nice hedge incase PGR doesn't pan out as well as I had hoped. I would buy AFL on dips.

  • Report this Comment On September 25, 2010, at 9:45 PM, lctycoon wrote:

    TRV and CB are not competition for AFL. They're all insurance companies, yes, but TRV and CB are both P/C companies and AFL isn't. It's a completely different animal.

    Also, AFL seems a bit expensive compared to those two. AFL is selling for more than twice the value of its assets. CB is selling for pretty close to the value of its assets and TRV is selling for less than the value of its assets on book. TRV is also dirt cheap compared to its free cash flow and has a massive buyback program (it's almost 20% of the value of all outstanding stock).

    I love AFL as a company, but it seems to be a bit pricier than these other two and they are in different industries.

    There's a lot of insurers right now that seem like a pretty good bet... many of which seem to be a better value than AFL.

    Don't get me wrong, I think you'll be happy with AFL, I'd just be a lot more interested if the price came back a bit.

  • Report this Comment On September 27, 2010, at 9:56 AM, TMFOpie wrote:

    @ lctycoon...yeah, Aflac has run a bit and it's not as cheap as it was, and certainly not as cheap as a year ago when investors thought the European banks would all default on their hybrid payments. But of any of the insurance companies, Aflac is one that I think you can nibble at now and grab a bit more if the market helps on the price. They have never been the cheapest stock based on price to book because they have such a good market position and generate those very high ROEs and use the cash wisely (like investments in technology, which is still in the works in Japan and Aflac is spending a lot to improve its paper management).

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