Aflac is the global leader in the supplemental health insurance industry. The company has humble roots in Columbus (Aflac stands for American Family Life Assurance Company of Columbus), where the company was founded by the Amos brothers (John, Paul, & Bill) in 1955.
In the 60+ years since, the company has grown at a rapid rate. Aflac generates annual revenue of nearly $22 billion, and is the world’s largest underwriter of supplemental cancer insurance. The company also provides accident, short-term disability, critical illness, dental, vision, and life insurance.
Roughly 70% of the company’s pretax earnings are derived from Japan, with the remaining 30% coming from the United States.
On January 31st, 2019 Aflac released fourth-quarter and full year 2019 financial results. For the quarter the company reported $5.13 billion in revenue, down 5.5% from $5.42 billion in the 2017 fourth quarter. Adjusted earnings-per-share totaled $1.02, up 27.5% from $0.80 year-over-year.
For the full year Aflac reported $21.76 billion in revenue, a 0.4% increase as compared to 2017. Aflac also reported $4.16 in adjusted earnings-per-share, a 22.4% increase compared to $3.40 in 2017. Earnings growth was driven by a lower tax rate, strong investment income and favorable benefit ratios.
For 2019, Aflac expects $4.10 to $4.30 in adjusted earnings-per-share.
With such significant operations in Japan, the company is heavily impacted by foreign exchange rate fluctuations. The recent strength of the U.S. dollar versus a variety of global currencies has been a headwind for this stock.
Fortunately, Aflac’s operations are highly profitable, with considerable growth potential.
In the company’s core market, Japan, Aflac is expanding its offerings of “third-sector” products. These include non-traditional products such as cancer insurance, as well as medical and income support.
Growth in these products is expected to continue, although Aflac expects overall sales in Japan to decline slightly in 2019.
Source: Investor Presentation
Aflac has enjoyed strong demand in Japan for third-sector products, due to the country’s aging population, and declining birthrate. Moving forward, Aflac expects 4%-6% annual growth in third-sector product sales in Japan.
Overall, investors can reasonably expect Aflac to grow earnings-per-share by 6% annually over the next five years.
Over the last decade shares of Aflac have traded hands with an average P/E ratio of roughly 10 times earnings. We believe this is more or less fair for the security, considering that many insurers trade at a comparable multiple.
With a price-to-earnings ratio of 11 based on expected 2019 earnings, the valuation could contract to fair value. This would reduce annual returns by just over 2% per year.
Fortunately, Aflac’s 2.2% dividend yield will offset this. Total expected returns are in the range of future earnings growth, estimated to be roughly 6% per year.
