Image: Aflac.
Many Americans know AFLAC (AFL +0.67%) for its commercials, but few understand just how much of a presence the insurance giant has across the Pacific in Japan. After its most recent financial report in late July, Aflac investors got a first-hand look at just how detrimental a strong dollar can be to a company that does much of its business in foreign currency.
Aflac Management, however, remains confident about the insurer's future prospects. Let's look more closely at what Aflac's own management said after its latest earnings to get some insight into what's ahead for the insurance company.
2015 continues to be a year of building in Aflac Group. We are making progress with advancing our relationships and our potential business opportunities through insurance brokers and the larger case market. -- CEO Daniel Amos
Aflac posted solid results in its latest quarter, with sales of third-sector products in Japan climbing by more than 25%. The cancer-insurance market in Japan remains strong, and the company's new medical product there has helped Aflac compete more effectively in a cutthroat industry. Meanwhile, Aflac hopes to grow sales for its U.S. unit by 3% to 7% this year, with an emphasis both on using third-party brokers, and on encouraging direct sales through large employers to their workforce personnel.
Even though Aflac will find it difficult to keep up the strong pace of sales gains it posted last year, the insurer nevertheless thinks it can boost sales toward the end of the year, and finish 2015 on a strong note.
[W]e will have opportunities to increase the capital available for deployment. Let me reiterate that our strong bias is first to continue with our strong record of dividend growth, followed by repurchasing of our stock and third, disciplined investment in organic growth initiatives. -- Amos
Aflac is well-known for its dividend, with 32 straight years of annual dividend increases, and a solid 2.7% yield. Investors can expect another increase toward the end of calendar 2015, but Amos also wants shareholders to know that the company plans to buy back $1.3 billion in common stock this year, and sustain solid buyback activity next year, as well.
Unlike many companies, Aflac hasn't hesitated to repatriate profits from Japan to support capital return to shareholders. During the next several years, shareholders will likely see even more dividend growth, with the potential for increased buyback activity, as well.
The sheer size of Japan is a challenge. ... I still believe the U.S. has enormous potential. -- Amos
Aflac has to deal with a tough situation in its core Japanese market, because the company's dominance there makes it hard for the insurer to get incremental gains from its already impressive leadership position. Because Aflac doesn't have the penetration in the U.S. that it does in Japan, the domestic market arguably holds greater opportunities for growth. Even though Aflac has done a good job of getting its products in front of potential policyholders in the U.S., especially through its workplace relationships, the company believes it can do even better, and eventually capture an even greater portion of the overall U.S. benefits-insurance market.
I think that the price of insurance companies is through the roof, and I can't possibly see anything [in acquisitions] making any sense at this particular time. -- Amos
When companies hit the wall in terms of organic growth, they often turn to mergers and acquisitions for further revenue and market-share gains. Yet Amos believes that insurance companies are fully valued right now, making it hard to see a deal that could make sense.
Amos didn't entirely rule out an acquisition, saying that small deals that could enhance internal growth might be valuable. Yet, in general, Aflac doesn't think the time is right for M&A-based growth, even as some of its competitors have made strategic moves in that direction.
One Day Pay has generated a lot of excitement with our distribution channels, accounts, and policyholders. ... I believe One Day Pay will continue to underscore the value of Aflac's products and ultimately help Aflac sales long-term. -- Amos
One key competitive advantage that Aflac has always trumpeted is its ability to get cash into its policyholders' hands more quickly than other insurers, and its One Day Pay capability to give policyholders resolutions on their claims within a day has driven interest in its products. With more than two-thirds of claims eligible for the process, One Day Pay could give nearly two million policyholders a great experience on their claims in 2015 alone.
Aflac's results have reflected the impact of a strong dollar on its yen-based revenue streams. Still, Aflac has plenty of potential to use its growth initiatives to overcome those currency challenges and produce long-term growth well into the future.
