A Dividend Aristocrat With a Lot to Quack About

When a business gets a lot of its revenue from abroad, some investors may not realize how well the company is performing. Aflac (NYSE: AFL  ) is a company that domestic investors know is represented by a duck, but international investors know the company as a fast-growing insurance conglomerate. With more than 30 years of dividend increases, the stock may deserve a second look. Let's see if investors should add this stock to their watchlist for further research, or if this duck is about to get cooked.

Hidden growth
One challenge facing Aflac is that the company gets a large portion of its revenue and income from Japan. Sometimes this works in the company's favor when a favorable conversion rate benefits earnings. Other times, the conversion rate hides good earnings. A good example of this negative phenomenon is Aflac's current quarter, in which it reported that earnings declined by 17%, but excluding currency, this decline was just 5%.

Looking at the bigger picture, the company relies heavily on its strong bank relationships in Japan to sell its products. In fact, this year, almost half the company's new Japanese sales came from the banking channel. In addition, the company has thousands of sales agencies offering its products. From cancer insurance to new convertible life insurance products, Aflac Japan represents the company's largest revenue and profit contributor.

If we look at Aflac's U.S. operations, the company is working methodically to gain traction in some of the largest insurance brokerages in the country. The company has mentioned multiple times that this endeavor will take time. Another challenge is Aflac believes low U.S. consumer sentiment is partially to blame for weaker results. That being said, if Aflac can diversify its revenue stream, international currency fluctuations should be mitigated somewhat in the future.

To further illustrate Aflac's strength hiding behind the reported numbers, let's again turn to the company's current quarter results. For instance, let's look at Aflac and its peers when it comes to premium income and net investment income performance.

Company Annualized Premium Growth (3rd Q 2012-3rd Q 2013) Annual Net Investment Income Growth (3rd Q 2012-3rd Q 2013)
Aflac 6% 5%
American International Group (NYSE: AIG) decline of less than 1% decline 4%
AllState (NYSE: ALL) 5% 3%

Source: SEC filings.

As you can see, Aflac's performance looks very strong relative to a few of its peers. This could be an opportunity for long-term investors who understand that currency fluctuations shouldn't cause investors to ignore organic growth.

Hiding in plain sight
One of the first things investors look at when determining whether to buy a stock is its dividend yield. Aflac gives investors a yield of nearly 2.3%, which is higher than the industry average of 1.8%. In addition, this yield is just slightly below the company's five-year average yield of 2.5%.

If you look at a few of Aflac's industry counterparts, you can see that the company's yield looks favorable. Allstate pays a yield of just under 2%, and AIG yields less than 1%. While it is just one point to consider, Aflac's superior yield certainly is another point in the duck's favor.

Growth, growth, and growth
While a decent current yield is one thing, many investors are looking for dividend growth. After 31 years of dividend growth, Aflac investors might wonder what is next.

The good news for shareholders is that Aflac is growing its top line. In the last two full years, the company grew revenue by more than 14% and nearly 7%, respectively. The company also grew its equity-to-assets ratio in each of the last two years.

With Aflac's strength in multiple areas, investors might be wondering what will happen with dividend growth in the future. If you look at the last five years, you'll see a pattern of growth that mirrors that of many companies in the financial industry.

Source: Nasdaq.com.

As you can see, coming out of the Great Recession in the 2009-2010 time frame, Aflac pulled back its dividend increases. As the economy improved, the dividend growth has returned.

With analysts calling for earnings growth of just over 5% from Aflac in the next few years, investors might be afraid that dividends may not grow at the same pace as in the past. However, the company recently increased its share repurchase target from $600 million-$900 million to a new target of $800 million-$1 billion. This seems to indicate management is confident in its ability to reward shareholders in the near future.

On the surface, it looks like Aflac may deserve a spot in a long-term investors' portfolio. If you believe Aflac is worth more research, just search AFL on Fool.com for more numbers, ratios, and news than you can quack at.

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