Dividend stocks are everywhere, but many just downright stink. In some cases, the business model is in serious jeopardy, or the dividend itself isn't sustainable. In others, the dividend is so low, it's not even worth the paper your dividend check is printed on. A solid dividend strikes the right balance of growth, value, and sustainability.
Today, and one day each week for the rest of the year, we're going to look at one dividend-paying company that you can put in your portfolio for the long term without too much concern. This isn't to say that these stocks don't share the same macro risks that other companies have, but they are a step above your common grade of dividend stock. Check out last week's selection.
This week, we'll turn our attention to supplemental health and life insurance company Aflac (AFL 2.22%) and I'll show you why this stock has set-it-and-forget-it type potential written in the cards.
A necessary evil
The insurance industry is one of those necessarily evils of life. We absolutely can't stand paying insurance of any kind, may never need it, and rarely get a dime back if we never do use it, but we are oh-so-thankful for it if a health or property disaster does arrive. The downside for the insurance company is that, at some point, disaster is going to rear its head.
Aflac, which generates about three-quarters of its revenue overseas in Japan, learned this firsthand when the tragic Tohoku earthquake struck in Japan in March 2011 and claimed upwards of 15,800 lives, according to Japanese government reports. As the largest life insurance provider in Japan, Aflac was required to pay out numerous policies, hurting its short-term prospects. But Aflac isn't alone.
In the U.S., Hurricane Sandy unleashed a similar fury on property and casualty insurance companies last year. Shortly after the megastorm, Allstate (ALL 1.97%) pegged its gross losses at a whopping $1.28 billion but thankfully regained about $200 million through reinsurance policies it had in place. Chubb (NYSE: CB), which is a global P&C insurance provider, was hit particularly hard in the Northeast, with preliminary estimates of $570 million in losses. Even reinsurers like AIG (AIG 1.92%) got smacked and delivered preliminary loss estimates of $1.3 billion. The point being that losses like this do happen with some frequency, and insurers like Allstate and Chubb, and reinsurers like AIG, pretty much expect the worst and are rarely disappointed.
The Aflac advantage
Keeping in mind that disasters are a somewhat regular occurrence for insurers, you might be wondering why on Earth you'd even consider investing into a company like Aflac, which insures people's lives in Japan and provides supplemental health insurance in the United States. The answer to that question lies in its pricing power.
What Aflac and the aforementioned P&C insurers share is one common business trait: the ability to raise prices. You see, unlike general health insurance, which is becoming more transparent by the day with the implementation of the Patient Protection and Affordable Care Act, supplemental health and life insurance pricing is still rather opaque, and there aren't too many providers to choose from. What this means for Aflac (and the rest of the insurance sector, for that matter) is that once a catastrophe does strike and it's required to redeem some of its in-force policies, it gives the sector all the justification needed to raise premiums to cover catastrophic losses should they occur again.
Insurance sector premium pricing is therefore just one ongoing knee-jerk reaction. Aflac is providing a security benefit to policyholders, and to do that and ensure redemption of those policies, it justifies previous disasters as the reasoning for boosting its premiums.
Clearly, what Aflac is doing is working. Had it not been for such a negative impact of the yen, which is the primary currency where it operates in Japan, the company would have delivered a constant currency EPS boost of 14.3% in the second quarter. On a constant currency basis, Japan's premium income rose nearly 9%, although new enrollment premiums were lower from the previous year. In the U.S., supplemental health insurance net income jumped 3.5%, while new annualized premium sales rose 1.4%.
Further helping Aflac has been its de-risking effort since 2011, which has moved its investment portfolio away from high-risk investments and toward safer investments. Although this translates to a lower investment yield in the interim, with the expectation of higher yields in the U.S. on the horizon, it sets up Aflac to surprise Wall Street in a big way in 2014 and beyond.
Show me the money, Aflac!
Where Aflac really stands out from its peers is in the way it rewards its shareholders. Aflac's management team has mostly brought a conservative approach to its investment and growth strategy, which has, in turn, led to consistent dividend growth and welcome share repurchases.
Over the past decade, Aflac has repurchased about 10% of its outstanding shares. By doing so, Aflac's management demonstrates confidence in the business, points to its stock as being undervalued over the long run by Wall Street, and lowers the number of outstanding shares that profits are compared against, thus boosting EPS.
The real allure of Aflac, though, is its dividend, which has been increased for an incredible 30 consecutive years. Just think about that -- Aflac, a financial company, came through the great recession and tragic Japanese earthquake only to raise its annual payout!
Over the trailing 10-year period, Aflac's quarterly payout has risen by a staggering 337.5%, or an annualized growth rate of 15.9%! Aflac isn't just taking care of policyholders; it's redistributing wealth directly back into the pockets of shareholders, who are delighted to take home this 2.3% annual yield.
If you look back at Aflac over the past decade, you'll find an insurer that's seen revenue more than double and whose book value is up by more than 150%! Aflac certainly isn't going to give you an overnight double or knock your socks off come earnings time. However, Aflac has incredible pricing power in an industry known for maintaining profitability in even the worst economic times. With its 30-year streak of improving dividends on its side and its forward P/E of less than 10, I see no reason Aflac wouldn't make the perfect set-it-and-forget-it investment for the ultra-long-term investor.