Dividend Aristocrats in Focus Part 12: AFLAC Incorporated (AFL)

Business Overview

AFLAC Incorporated (NYSE:AFL) provides supplemental insurance. When a policyholder gets sick or injured and cannot work, Aflac pays cash to help them meet life’s regular expenses. Aflac is the number one provider of individual voluntary insurance products in the U.S.

Investing in high quality insurers (which Aflac is) at low price-to-earnings ratios (which Aflac has) is a powerful wealth compounding strategy.  The story of Shelby Davis and his 23.2% CAGR (1) can attest to that.

Most investors would probably assume Aflac does most of its business here in the U.S., given its well-known brand and its popular duck logo.

Source:  Quote Addicts (2)

But the truth is that Aflac does far more business in Japan than in the U.S. In fact, Aflac collects 75% of its premium income from Japan, and it insures one in four households in Japan.

Aflac maintains a clear growth strategy. Abiding by this strategy has fueled Aflac’s impressive growth over its many decades of existence.

Source: 2015 Annual Report, page 3 (3)

The current business environment is a difficult one. The continuation of the Federal Reserve’s low interest rate policy has kept a lid on Aflac’s growth potential. The reason for that is because financial companies like Aflac earn less on their pools of invested capital when interest rates are low. As an insurance company, Aflac makes money in two ways.

First, it issues policies and collects premiums. The second way it earns income is by investing the large sum of accumulated premiums that have not been paid out as claims. This is referred to as the float.

Low interest rates weighed on Aflac last year. Aflac’s net investment income fell 5.6% in 2015.

Still, despite low interest rates, Aflac is highly profitable. Aflac’s operating earnings held flat last year, but Aflac still turned in earnings-per-share of $6.16. Its performance was even better if you adjust for currency fluctuations. Aflac’s currency-neutral operating earnings-per-share would have increased 7.5% last year.

Aflac’s growth is accelerating in 2016. Through the first six months of the year, revenue and operating profit grew 4% and 13%, respectively, year over year. In the key Japan market, revenue increased 8% through the first half of the year.