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

Growth Prospects

AFLAC Incorporated (NYSE:AFL)’s major growth driver going forward will most likely be in Japan. That is because the company conducts most of its business there already, and the market fundamentals in Japan are attractive.

Source: Raymond James 2016 Institutional Investors Conference, page 4

Japan is seeing robust growth in demand for health care, which is flowing through to Aflac. In addition, Aflac has begun selling third-sector products there, which are non-traditional supplemental policies. For instance, one of Aflac’s most popular third-sector product in Japan is cancer insurance given to customers who have had cancer before but have been cancer-free for at least five years.

On Aflac’s most recent quarterly conference call, management stated that third-sector sales have come in well above expectations. Management expected third-sector sales would range from down 3% to up 2%. Last quarter, third-sector sales in Japan increased 11%.

A second growth catalyst for Aflac moving forward is rising interest rates. As discussed above, low rates have hurt Aflac over the past few years. But the Fed raised interest rates in December last year, which helped fuel But conditions have improved this year, thanks to the Fed’s decision to hike rates last December. Over the first half of 2016, Aflac’s net investment income increased 4.1% year over year.

Competitive Advantages & Recession Performance

Aflac performed admirably throughout the Great Recession of 2007 to 2009, given that the financial sector was the hardest hit market sector. Although earnings-per-share did dip in 2008, Aflac’s premium income rose throughout the recession.

One reason for Aflac’s recession-resistant business model is that life and health insurance are difficult to cut back on, even in times of economic uncertainty.  As a result, Aflac’s operations are not significantly impacted by recessions.

The company’s earnings-per-share each year through the Great Recession of 2007 to 2009 and subsequent recovery are shown below to illustrate this point:

• 2007 earnings-per-share of $3.27 (new high)
• 2008 earnings-per-share of $2.62 (recession low)
• 2009 earnings-per-share of $3.91 (new high)
• 2010 earnings-per-share of $5.13 (new high)

Aflac currently has a low payout ratio of 26.5%.  The company’s combination of stable (and growing) earnings and a low payout ratio make it very likely the company continues to pay rising dividends – even through recessions.