Stocks have enjoyed an incredible run since the depths of the financial crisis, but, with the average S&P 500 company now sporting a P/E ratio of 24.8, valuations are beginning to look a bit stretched by historical standards. After all, the historical average P/E ratio for the S&P 500 is under 16.
With that in mind, here are three solid companies -- AFLAC Incorporated (NYSE:AFL), Skyworks Solutions Inc (NASDAQ:SWKS), and Verizon Communications Inc. (NYSE:VZ) -- with good business models and competitive advantages all for a P/E ratio under 14.
A quackin' good value
Thanks to those beloved commercials featuring the Aflac Duck, most U.S. consumers know that Aflac is an insurer selling supplemental insurance policies for things such as workplace injuries and cancer. What many people might not know, however, is that Aflac makes about two-thirds of its money in Japan.
One advantage insurance companies have over other business models is that they collect premiums before they pay out claims. Aflac conservatively invests this money, called float, in dollar- and yen-based fixed income securities.
One of the best ways to measure an insurance company's performance is with the use of the combined ratio, the sum of claim losses and expenses divided by the insurer's earned premiums. A combined ratio under 1.0 indicates the company is running a profitable enterprise before the interest it earns from the float is taken into account. Conversely, a combined ratio over 1.0 shows the company is losing money from its operations.
For Aflac, all applicable figures can be found on its latest 10-Q filing with the SEC. For the numerator, go to page three and add Aflac's "Benefits and claims, net" with "Total acquisition and operating expenses." The denominator can be found by adding Aflac Japan's and Aflac U.S.'s net earned premiums from page 14 of the 10-Q. That gives us a combined ratio of 95.6%.
I have done this calculation for Aflac many times over the years, and each time it comes to less than 100%.
There are several bullish takeaways from the company's first quarter, but the most important is that the company is simultaneously receiving nice boosts from rising interest rates and the new tax legislation. Based on its trailing-12-month adjusted earnings per share of $3.61 (adjusted for a 2-to-1 stock split earlier this year), Aflac trades at a P/E ratio of just 12.5, essentially half of the average S&P 500 multiple. For a consistently profitable insurance company with tailwinds at its back and a proven track record of hiking its dividend, that's quite the deal.
The sky is the limit
Skyworks Solutions designs and manufactures semiconductors that enable devices such as smartphones, wearables, and smart home devices to connect to Wi-Fi and wireless signals. As such, the company is poised to benefit from macro trends such as the rollout of 5G and the Internet of Things (IoT).
In the company's second-quarter conference call, transcribed by S&P Global Market Intelligence, CEO Liam Griffin talked about how the explosion of data in our world is driving the need for powerful connectivity engines. He said:
"At a higher level, the overarching connected economy is rapidly expanding, with global data traffic expected to grow 40% compounded over the next 5 years. High-performance data centers are enabling client-to-cloud big data analytics, supporting artificial intelligence, autonomous vehicles, industrial IoT, machine learning and virtual reality while facilitating a multitrillion dollar ecosystem. The sea change toward mobility harnessing cloud access and storage is creating commensurate demand for increasingly more powerful connectivity engines. Our mission at Skyworks is to enable this data-driven world, powering billions of new intelligent devices through instantaneous, reliable and secure wireless connectivity. "
In the company's second quarter, revenue rose to $913.4 million, a 7.2% increase year over year, and adjusted earnings per share grew to $1.64, a 13% increase year over year. Given its trailing-12-month adjusted EPS of $7.03, the company trades at a P/E ratio of just 13.8. With a rapidly growing dividend, huge societal changes at its back, and a compelling value, Skyworks is the type of company that could reward investors with market-beating returns for years.
A big value for a big network
Verizon consistently earns accolades from third parties for having the best wireless network. This is undoubtedly the reason why Verizon reigns supreme as the largest domestic network with more than 116 million retail wireless connections. The company's huge network is its bread-winner, making it one of the few stocks that pays a dividend yield of over 5%.
Like Skyworks, Verizon is well-positioned to take advantage of the coming 5G wireless revolution. In the company's first-quarter conference call, management maintained its long-standing position that it would launch 5G in three to five cities later this year, including Sacramento, California. Better yet, CFO Matthew Ellis said, one 5G network brings the company many additional possible revenue streams, such as residential broadband and mobile networks.
"We're deploying a 5G network that will have multiple revenue streams off of it, so we're very excited about the ability to do that, and in addition to having multiple revenue streams, we're using a lot of existing assets we have in the field already today," Ellis said.
Beyond its network, Verizon is also exploring other potential avenues for making money. Given the valuable data it has on Yahoo! and AOL users, it will begin to sell targeted ads. Ellis also said the company is exploring OTT media offerings for its first 5G customers.
Given the company's trailing-12-month earnings of $3.91, the company is trading at a P/E ratio of 12.4, the lowest valuation of the stocks highlighted in this piece. Given the company's high yield, quality network, and low valuation, Verizon is a bargain that all value investors should check out.