Friday, November 7, 2008

Aflac (AFL) Dividend Stock Analysis

Aflac Incorporated, through its subsidiaries, engages in the marketing and sale of supplemental health and life insurance in the United States and Japan. It underwrites individually issued policies, and markets its policies through independent agents, as well as through independent corporate/individual agencies and affiliated corporate agencies.

Aflac is a dividend aristocrat as well as a component of the S&P 500 index. It has been increasing its dividends for the past 26 consecutive years. From the end of 1998 up until October 2008 this dividend growth stock has delivered an annual average total return of 8.30 % to its shareholders. This year however the stock is down almost 29%. The company recently announced a 16.7% increase in its dividends in 2009.

At the same time company has managed to deliver a 13.70% average annual increase in its EPS since 1998. 71% of earnings in 2007 came from Aflac's Japanese operations. This makes the company's US dollar denominated earnings especially vulnerable to the fluctuations in currency rates of the us dollar against the japanese yen.

The Return on Equity has been in a tight range between 12% and 19% over the past decade.

Annual dividend payments have increased by an average of 20.40 % annually over the past 10 years, which is much higher than the growth in EPS. A 20% growth in dividends translates into the dividend payment doubling almost every 4 years. If we look at historical data, going as far back as 1986, AFL has indeed managed to double its dividend payment almost every four years on average.

If we invested $100,000 in AFL on December 31, 1998 we would have bought 9249 shares (Adjusted for a 2:1 stock split in March 2001). In March 1999 your quarterly dividend income would have been $88. If you kept reinvesting the dividends however instead of spending them, your quarterly dividend income would have risen to $716 by September 2008. For a period of 10 years, your quarterly dividend income would have increased seven times. If you reinvested it however, your quarterly dividend income would have increased over eight times!

The dividend payout has slowly increased from 15% in the late 1990s to 23% in 2007. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

AFL currently trades at a low price/earnings multiple of 15 and at a low dividend payout ratio. The current dividend yield of 2.60% is below my increased minimum yield requirement by a tiny margin. I would consider initiating a position in AFL on dips below $37.30.

Full Disclosure: Long AFL
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