Please ensure Javascript is enabled for purposes of website accessibility

Why Aflac Might Be the Best Long-Term Dividend Stock

By Jason Hawthorne - Jun 25, 2021 at 6:10AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

This insurer has the look of a high-yielder with staying power.

Investors looking for yield don't have it easy these days. With interest rates not far from all-time lows, bonds and certificates of deposit (CDs) don't provide the income they used to. The S&P 500 index is at all-time highs, pushing its dividend yield to the lowest since at least the dot-com bubble two decades ago.

That combination makes Aflac's (AFL 0.44%) payout even more impressive. The provider of supplemental life and health insurance -- coverage for expenses not paid by regular insurance -- is a slow grower. But its consistent distribution, steady top line, and attractive valuation might make it perfect for those who want a healthy yield but are afraid of stock-price declines.

A middle-aged couple reviewing documents with an insurance broker.

Image source: Getty Images.

A dependable payout

Aflac has reliably distributed cash to shareholders through wars, manias, financial crises, and a pandemic. The company has raised its dividend for 38 consecutive years. The increases have varied year to year, but its latest was an 18% jump. The increases have averaged 8% per year over the past decade.

Aflac has done this while also buying back shares. In addition to the company's impressive 2.5% dividend, management has returned an extra 3% per year since 2013 in the form of share repurchases. Dividends keep rising, and the number of outstanding shares keeps shrinking. It's a one-two punch that conservative investors should love.

AFL Dividends Paid (TTM) Chart

AFL Dividends Paid (TTM) data by YCharts.

Despite consistently raising the payout, the company still has plenty of cash left over. Its payout ratio -- the percentage of net income distributed as dividends -- was only 15% for the past 12 months. That measure hasn't been above 27% in a decade. It means the board of directors will have no trouble continuing to increase dividends in the future.

A cheap option in an expensive market

The company isn't exciting, and one way that can show up is a low valuation. Here, Aflac fits the bill. Because of the slow growth, life insurers typically trade at low multiples of earnings. But Aflac is cheap, even for this group.

The median price-to-earnings (P/E) ratio of the seven largest U.S. life insurers is currently about 14. Aflac, which has historically had a P/E ratio of between 7 and 13, trades for 6.8 times earnings.

AFL PE Ratio Chart

AFL PE Ratio data by YCharts.

The stock might have a low valuation because of the pandemic. When people don't seek treatment, costs go down. The benefit ratio -- the cost of providing care as a percent of premiums collected -- was 39.1% in the first quarter of 2021. That's a full 9 percentage points below what it was in the first quarter of 2020.

Management has said that temporarily inflates profit margins and expects the number to normalize in the back half of this year. That said, the stock still trades at a reasonable 10 times the average of the past five years' earnings. Even compared to normal times, the stock isn't expensive.

Set it and forget it

Aflac's ability to raise the dividend each year, its commitment to doing so, and the stock's cheap valuation might make it the best stock for long-term investors. Despite slow growth in an industry that lacks excitement, Aflac should provide an attractive payout and let investors ignore the short-term market gyrations.

If you're looking for a low-drama stock that provides dependable income, Aflac may be the perfect addition to your portfolio.

Jason Hawthorne has no position in any of the stocks mentioned. The Motley Fool recommends Aflac. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Aflac Incorporated Stock Quote
Aflac Incorporated
AFL
$59.43 (0.44%) $0.26

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
377%
 
S&P 500 Returns
123%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/08/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.