We came across a bullish thesis on Aflac Incorporated (AFL) on Pacific Northwest Edge’s Substack by David. In this article, we will summarize the bulls’ thesis on AFL. Aflac Incorporated’s share was trading at $112.14 as of Oct 23rd. AFL’s trailing and forward P/E were 11.82 and 15.95 respectively according to Yahoo Finance.
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Aflac (AFL), founded in 1955 in Columbus, Georgia, is widely recognized for its supplemental insurance policies, primarily covering cancer, accidents, and critical illnesses. These policies function by providing lump-sum payments upon diagnosis or injury, followed by smaller payments throughout the treatment process. A key differentiator is that Aflac’s payments go directly to policyholders, not healthcare providers, making them an effective form of replacement income during times of need. Notably, about 70% of Aflac’s revenue is generated from Japan, where the company has successfully capitalized on the health-conscious culture and a significant need for cancer-related coverage. This unique market positioning was established when the company’s founder observed Japanese individuals wearing masks to prevent illness in the 1970s, recognizing an opportunity to offer health-related financial protection in a society grappling with the stigma of cancer.
Historically, Aflac has demonstrated strong financial metrics and consistently outperformed the S&P 500. While its recovery after the COVID-19 market downturn was slower than that of the S&P 500, Aflac’s reliability in delivering shareholder value is noteworthy, particularly in the context of broader market fluctuations. Aflac’s ability to translate nearly all its operational cash flow into free cash flow enables substantial returns to shareholders through buybacks and debt repayment, reflecting the company’s commitment to enhancing shareholder equity without diluting ownership.
Financially, Aflac is in a robust position. The enterprise value (EV) relative to earnings before interest and taxes (EBIT) reveals a significant undervaluation, indicating that the market may be underestimating Aflac’s financial health. The company’s current ratio indicates a healthy balance between current assets and liabilities, further reinforcing Aflac’s stability, as it adheres to regulatory requirements for maintaining reserves to pay future claims. Aflac continues to be undervalued in terms of earnings, warranting a P/E ratio above 15—potentially approaching 20—due to its consistent outperformance of the S&P 500. The insurance sector is often overlooked resulting in lower valuations. Despite its currently high P/E, this is a favorable entry point. Furthermore, Aflac’s historical price-to-earnings ratio indicates that its stock remains appealing relative to its long-term performance, reinforcing its status as a compelling investment opportunity.
Overall, Aflac’s strong cash position, modest debt levels, and established revenue streams—coupled with its unique market niche and consistent operational performance—position it as a solid investment. With a history of delivering returns even amidst market volatility, Aflac’s current valuation presents an appealing entry point for investors seeking reliable growth in the insurance sector.
Aflac Incorporated is also not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 25 hedge fund portfolios held AFL at the end of the second quarter which was 24 in the previous quarter. While we acknowledge the risk and potential of AFL as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than CL but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.