Thanks to Europe, This Solid Dividend Is Cheap

Dividend stocks are usually safe havens during uncertain economic times. Sadly, for companies located inside the Eurozone, that simply hasn't been the case this year. Shares of European dividend stalwarts like France Telecom (NYSE: FTE  ) and Telefonica (NYSE: TEF  ) have both shed a quarter of their value this year, despite offering outsized dividends.

There's one dividend-paying company that actually does no business at all in Europe, yet has still suffered in 2011 because of the ongoing crisis: Aflac (NYSE: AFL  ) . Read below, and you'll see why I think shares may be trading at a significant discount today. At the end, I'll offer you access to 11 more of our best dividend ideas as well.

The underlying business
Everyone is familiar with the Aflac duck, but beyond that, few know what this supplemental insurance company actually does. Like other insurers, they offer protection against losses; with Aflac, customers are buying policies to offer supplemental income should they somehow lose that income.

The company only really does business in two countries: Japan and the U.S. Contrary to what you may think, the vast majority of their business (83%) is in Japan. That's why the growth in premiums paid to the company from the country is so impressive.


2010 Premiums

2011 Premiums


Japan  $9,849  $11,490 17%
U.S.  $3,438  $3,547 3%

Source: SEC filings. Figures in millions for the first nine months of 2010 and 2011.

While it'd be nice to see more traction in the American market, Japan is clearly the driver of growth right now.

Then, take a second to consider how cheap the stock is by taking a look at the metrics below. By just about every measure, Aflac appears to be a super bargain.

P/E 10.8
Forward P/E 6.4
PEG Ratio 0.6
Price-to-Book 1.56
Dividend Yield 3.2%
Payout Ratio 30%

Source: Yahoo! Finance.

And all this while offering a solid 3.2% dividend yield that the company uses only 30% of their earnings to pay out -- meaning there's tons of room for the dividend to grow.

With all of these factors staring investors in the face, it's fair to ask: Why is the stock trading so cheap?

Back to Europe
Insurance companies don't just take in premiums, sit on them, and then pay them out when claims come in. Instead, they take a portion of those premiums -- called "the float"-- and invest it in relatively safe vehicles so they can turn an extra profit.

For years, investing in bonds, sovereign debt, and banking debentures were fairly safe avenues to a guaranteed return -- and that's exactly what Aflac did with its float.

As we all know by know, that all changed this year. The eurozone crisis has cut investor confidence in Europe off at the knees. MF Global (OTC: MFGLQ) collapsed in dramatic fashion because of bad bets on Europe. And Aflac had a good chunk of their float invested in European sovereign debt.

Changes to the balance sheet
When things started to get hairy earlier this year, Aflac took a hard look at its investments. Management saw money invested in National Bank of Greece (NYSE: NBG  ) , as well as in the governments of Greece and Portugal, and decided to cash out of those investments. Interestingly, the company chose to keep its position in the troubled National Bank of Ireland (NYSE: IRE  ) , saying that they, "believe [the bank] has the ability to meet its obligations to us."

While investors had to cringe as the company swallowed a $1.1 billion loss on those investments, Aflac is now free and clear of any investments in Greece or Portugal, and only has limited exposure to Ireland.

While you would think this would hearten some investors, that simply hasn't been the case. Institutional investors are sitting on the sidelines, waiting for the picture to clear up in Europe before jumping back in.

But where some look and see fear, others smell opportunity. If you believe the eurozone will still be intact -- and out of recession -- by the end of 2012, Aflac seems to me like a great investment right now. I own shares myself, and will be initiating a bullish CAPScall on my CAPS profile, too.

If you'd like 11 more dividend-paying companies to consider, I suggest you check out our special free report: "Secure Your Future With 11 Rock-Solid Dividends." These stocks have been thoroughly vetted by our analysts, and will provide a solid core for any retirement portfolio. Get your copy today, absolutely free by clicking here!

Fool contributor Brian Stoffel owns shares of Aflac. You can follow him on Twitter at @TMFStoffel. The Motley Fool owns shares of Telefonica and Aflac. Motley Fool newsletter services have recommended buying shares of France Telecom and Aflac. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (4) | Recommend This Article (16)

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 December 23, 2011, at 2:59 PM, Seek100 wrote:

    AFL has a large portion of their investment in Europe, that probably why it move with a high correlation with Europe, and it hit by the nuclear crisis as well. They did add a new hire from Goldman.

  • Report this Comment On December 23, 2011, at 4:43 PM, TJOMAHO75 wrote:

    I believe that the Irish bank mentioned in this article is Bank of Ireland (IRE), not "National" Bank of Ireland. Ironically, it is the only major bank in Ireland that wasn't nationalised. Sloppy.

  • Report this Comment On December 23, 2011, at 5:28 PM, wirebender449 wrote:

    Many foreign stock dividends don't impress quite as much after deducting the foreign taxes-such as Telefonica's 19% .

  • Report this Comment On December 23, 2011, at 5:38 PM, TMFCheesehead wrote:

    @seek100-They certainly do still have investments in Europe, though they didn't break out the current level of those investments in their latest filing outside of the PIIGS.


    Same ticker, slightly different name, same company. Point well taken, though.


    True, though that's not something to count against AFL.

    Brian Stoffel

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