Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Aflac (AFL 0.69%) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.
What we're looking for
The graphs you're about to see tell Aflac's story, and we'll be grading the quality of that story in several ways:
- Growth: Are profits, margins, and free cash flow all increasing?
- Valuation: Is share price growing in line with earnings per share?
- Opportunities: Is return on equity increasing while debt to equity declines?
- Dividends: Are dividends consistently growing in a sustainable way?
What the numbers tell you
Now, let's take a look at Aflac's key statistics:
AFL Total Return Price data by YCharts.
|
Passing Criteria |
3-Year* Change |
Grade |
|---|---|---|
|
Revenue growth > 30% |
22.3% |
Fail |
|
Improving profit margin |
16% |
Pass |
|
Free cash flow growth > Net income growth |
60.9% vs. 41.9% |
Pass |
|
Improving EPS |
42.9% |
Pass |
|
Stock growth (+ 15%) < EPS growth |
39.5% vs. 42.9% |
Pass |
Source: YCharts. *Period begins at end of Q3 2010.
AFL Return on Equity (TTM) data by YCharts.
|
Passing Criteria |
3-Year* Change |
Grade |
|---|---|---|
|
Improving return on equity |
(13.1%) |
Fail |
|
Declining debt to equity |
19.2% |
Fail |
|
Dividend growth > 25% |
23.3% |
Fail |
|
Free cash flow payout ratio < 50% |
5.9% |
Pass |
Source: YCharts. *Period begins at end of Q3 2010.
How we got here and where we're going
We looked at Aflac last year, and it's dropped three of the passing grades it earned in 2012 in its second assessment, to finish with only five out of nine possible passing grades. Some of these failures were very narrowly below the bar -- the company's revenue growth fell short because of the strong position of the dollar in currency markets, and its three-year dividend growth was less than 2% below our cutoff point. Aflac has a good chance to earn a perfect score next year, but it will have to do a lot of things right. Can this global insurer become one of the market's best stocks in 2014? Let's dig a little deeper to find out.
Aflac's latest results disappointed on both top and bottom lines , which fell by 14% and 17%, respectively -- but this was largely the result of international exposure and an unfavorable exchange rate. However, the company should benefit from Japan's improving macroeconomic conditions, and from rising interest rates in the U.S., widely predicted to take place next year. Fool contributor Chuck Saletta, who's made Aflac part of his real-money "Inflation-Protected Income Growth" portfolio, touts the stock as a low-risk investment with a history of rising payouts. Aflac's 30-year dividend-raising streak and dividend yield of 2.3% has made it a consistent income outperformer over insurance peers MetLife (MET +0.16%), AIG (AIG +5.31%), and AllState (ALL 0.05%) during the three-year tracking period:
AFL Dividend Yield (TTM) data by YCharts.
However, it's worth noting that Aflac has actually underperformed its fellow insurers on a total-return basis, narrowly in most cases, but notably when compared to Allstate:
AFL Total Return Price data by YCharts.
Fool contributor Matthew Frankel notes that Aflac has been able to achieve tremendous success with its marketing efforts in Japan -- FBR Capital recently upgraded Aflac to outperform due to an expanded distribution deal with Japan Post, the most popular place to buy insurance in Japan. Many analysts believe the company's earnings are poised to increase by over 5% per year over the next few years. Moreover, the total value of Aflac's long-term investment assets is valued at $116 billion, which could generate substantial returns once interest rates rise -- a 1% increase in investment returns would produce $1.16 billion in additional income for Aflac.
With a P/E of 10.1, Aflac seems to be a screaming bargain for investors, given its ability to raise prices for supplemental health and life insurance, which are largely opaque even after Obamacare's implementation. In contrast, MetLife and AIG trade at a P/E of 23.8 and 9.7, respectively, but their earnings history is rougher than Aflac's.
Putting the pieces togesther
Today, Aflac has some of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.
