When companies continually raise their dividends each year, it eventually becomes part of their identity as an investment. Shareholders will often hold a stock simply for the annual payout and raise. Dividend Aristocrats like insurance company Aflac (AFL 0.28%) are S&P 500 companies that have raised their dividends annually for at least 25 years straight.
Investors often assume that dividend stocks are "boring" and don't have much growth in the tank. However, Aflac's stock price is up more than 50,000% over its lifetime, creating wealth for investors. Is the duck done growing? Here are three reasons why the growth story will continue.
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1. Aflac has more selling opportunities in the U.S. and Japan
Aflac is an insurance company that sells various insurance products in Japan and the U.S., including insurance for life, cancer, nursing care, dental, medical, supplemental, and more. Its key market is Japan, where it generates roughly 70% of its revenue, and the U.S. These two countries total more than 450 million people.
Aflac's customer base is currently about 50 million, which gives the business growth opportunities in picking up new customers and cross-selling products to its customer base.
Aflac's specialty is supplemental insurance that covers costs that primary insurance won't. For example, Japan has a national healthcare system, but if you get sick, it might not cover all of your co-pays or living expenses if you miss work. People take out Aflac insurance to cover many of these scenarios.
Aflac insures one-in-four households in Japan, but that could grow. The company's market penetration rate, which is how much of the population can access Aflac's insurance, is 73% for medical insurance, but just 42% for cancer policies, and 12% for nursing care.
Meanwhile, there are still 127 million workers in the U.S. that don't have access to Aflac's insurance products through their employers. As Aflac builds direct-to-consumer channels for its products, such as Aflac Direct online, there's an opportunity for the company to increase its penetration in the U.S.
2. Aflac benefits from rising interest rates
Companies like Aflac don't just sit on that money when you pay your monthly insurance premium. The premiums are invested as a big pool of funds, called the "float." Insurance is competitive. Every company is trying to charge the lowest amount it can to its customers while still making some money. Investing its premiums help generate income for the business.
Aflac must be careful, though. It can't risk taking losses on its investments and potentially being unable to afford to pay its claims. So insurance companies will usually invest in bonds to generate yield while being at little volatility risk.
Aflac currently has $143 billion in investments and cash at the end of its fiscal 2021 year, which ended Dec. 31, 2021. Most of its assets are in bonds, primarily from the Japanese government, and debt from public and private U.S. companies. Aflac's portfolio collectively yields 2.88% and carries an average credit rating of A-minus.
High inflation continues to threaten to push interest rates higher, which would likely get Aflac higher yields on the bonds it purchases. If you're looking for a stock that would benefit from rising interest rates, Aflac would fit that bill.
3. Aflac's massive dividend raise reflects confidence in business
How about a vote of confidence from Aflac's management? The company raised its dividend in the third quarter of 2021 for the 39th consecutive year, putting this Dividend Aristocrat one year closer to royalty as a Dividend King.
But what was notable about this raise was its size; the payout rose a whopping 21%, dwarfing the average 7.5% per-year increase the company has given over the past decade. This wasn't a fluke, either. The company raised its dividend by nearly 18% in November of 2020.
The company can afford these increases; the dividend payout ratio is roughly 15% of Aflac's profits. More importantly, the gains could be a sign from management about their confidence in the company's growth prospects moving forward.
Final takeaway
Aflac won't be as flashy as the latest technology stock, but if you're trying to find a blue-chip stock with a proven track record, you're on the right track with Aflac. The future seems bright, considering the company's ongoing growth opportunities through cross-selling and potential customer additions.
The stock price has gone up roughly 40% over the past year, so it could lose some momentum if investors begin flocking back to the high-growth names that faltered through much of 2021. Still, Aflac seems like a long-term winner that can still do wonders for investors with a multi-year time horizon.
