Being an intelligent investor means not only understanding why a company's stock price might rise, but why it might fall. So, while I can't claim to predict the future, here are three possible reasons Aflac's (NYSE:AFL) stock price could fall.
3. Japanese economy
With 75% of Aflac's revenue coming from its operations in Japan, the company's stock price has historically followed the strength of Japan's economy.
Since 2012, Aflac has benefited from Japan's improving gross domestic product. But, there are some troubling signs ahead: Japan's population is in decline -- this means fewer taxes, workers, growth potential, demand, and so on -- tax hikes and a weaker yen are hurting consumer spending, and, pound-for-pound, Japan is No. 1 in the world in government debt.
To help improve the economy, similar to the U.S. Federal Reserve, the Bank of Japan is using a system of "quantitative and qualitative easing." This includes adding financial stimulus (buying government bonds), lowering interest rates, and implementing structural reform. While I am not an expert on Japan's economy, nor will I pretend to be by attempting to predict future growth, if the Japan's GDP declines, it's likely Aflac's stock price will as well.
2. Lower sales
One of the big reasons Aflac's stock price follows the relative strength of Japan's economy is because of the type of insurance it sells. For instance, a typical health insurance plan will cover medical bills if you break your leg, but if you miss work for a month because of that broken leg, you're out of luck. A plan with Aflac, however, could help supplement your income.
Here's the problem: If the economy is down in the dumps, the average consumer may not have excess funds to pay for additional insurance. So, sales could see a decline.
On a slightly different note, Aflac has recently launched two new cancer insurance products. One will be sold exclusively through its partnership with Japanese banking, insurance, and post office conglomerate Japan Post. The other will be sold through Aflac's other distribution channels. Cancer insurance is one of Aflac's faster growing segments, and these two products have been pretty well hyped. However, with cancer sales down 12.6% in Japan year over year, if the products were to flop, it is likely the company's stock price could take a hit.
1. Higher expenses and claims
On the other side of sales is expenses, and in both Japan and the U.S., Aflac could see higher expenses. According to Aflac's executive vice president Ken Janke, "[W]e still expect to see higher benefit ratios in the fourth quarter and expenses will be higher as well."
I'll start with expenses, Aflac is making a multi-year investment in technology, billing systems, and marketing -- or what is collectively referred to as "business systems and processes." The company is also making large-scale changes to management structure and increasing sales incentives in the U.S.
Second, Janke mentioned potentially higher benefit ratios. This compares how much money Aflac is collecting from insurance premiums versus how much it's paying out in claims. The amount of claims Alfac pays out will vary from quarter to quarter, but a higher benefit ratio raises expenses and cuts into earnings.
Excluding extreme scenarios, none of these factors alone would have much of an impact. However, combine a few of these factors, and it would be enough to lower earnings and have a negative effect on Aflac's stock price.
Will Aflac's stock price fall?
All stocks do, so I'm sure it will at some point. But, I think the pros outweigh the cons. I believe in Aflac's tremendous track record, its history of underwriting insurance profitably, and its management -- which is long-term focused and has a history of taking care of shareholders through share repurchase and dividends. So, while I do have my concerns over the potential strength of Japan's economy, I think Aflac is a solid long-term investment.
Dave Koppenheffer has no position in any stocks mentioned. The Motley Fool recommends 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.