In order to consider a Dividend Aristocrat for investment, one is likely required to pay a premium valuation. Through the dGARP (Dividend Growth at a Reasonable Price) method, if you can make an investment in a dividend growth stock while currently priced below market value you will minimize downside risk from dividend cuts or flat out stagnant earnings growth. At Millionaire Mob, we seek to find investments that possess both dividend income through dividend growth and the opportunity for capital appreciation via earnings growth, and ultimately, the stock price.
When you are able to invest in a Dividend Aristocrat at an attractive valuation, you must move quickly because it is unlikely to last long. Dividend Aristocrats possess enviable characteristics in terms of strong management team, operational excellence and financial discipline.
This Dividend Aristocrat is a No-Brainer for Dividend Growth Investors
Investing in Dividend Aristocrats is a proven strategy that typically outperforms the S&P 500 and has lower volatility over the long-term.
Dividend Aristocrat stocks have a history of increasing dividends at least 25 consecutive years and are typically viewed as the best-of-breed dividend growth stocks.
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Undervalued Dividend Aristocrat to Buy Now: Aflac, Incorporated (AFL)
Does everyone remember when the insurers were in the penalty box? A number of insurance companies were trading below book value with limited sight to growth as a result of low interest rates. That was a fantastic buying opportunity and was when I began accumulating shares of a variety of insurance companies. However, it is not too late to buy into high-quality insurance companies that look poised for strong growth in the coming years leading to extraordinary capital returns to shareholders.
Aflac fits the mold for a perfect stock for our investing strategy called the dGARP method, which seeks investment in companies that pose Dividend Growth at a Reasonable Price.
Everyone know the famous Aflac duck!
Why Invest in Aflac Common Stock?
We will provide a brief review of Aflac on both a qualitative and quantitative basis for your evaluation on whether or not to make an investment in Aflac common stock.
For disclosure, we are currently long Aflac common stock in our Robinhood dividend growth portfolio.
Aflac (AFL) Stock Qualitative Review
Let’s take a qualitative review of Aflac before diving into the numbers. Aflac stands for American Family Life Assurance Company and is an American insurance company. Did you know Aflac is the largest provider of supplemental insurance in the United States?
Aflac has been in operations since 1955 and is based in Columbus, Georgia. I’m sure you have seen the number of commercials featuring the Aflac duck. Their brand name and reputation is unparalleled.
Aflac’s go-to market strategy is relatively straightforward:
Source: Aflac Investor Presentation
In addition, in the U.S., Aflac has a great market opportunity to address in the near-term. With an growing working population, there is approximately 40.1 million that have access to Aflac, but don’t actually have their service.
Source: Aflac Investor Presentation
Aflac is a Respected Brand in the Insurance Industry
I love seeing when a company is highly regarded as an employer. I think that speaks volumes to the culture and the ‘it’ factor for a company. You cannot see the culture on a daily basis as an investor. Aflac has been known for winning the following awards and industry rewards:
- Aflac has appeared on Fortune’s 100 Best Companies to Work For list for 17 consecutive years.
- Another award: Aflac has appeared on Fortune America’s Most Admired Companies list for 15 years.
- AFL has been recognized by Ethisphere magazine as a World’s Most Ethical Companies for 10 consecutive years, and is the only insurance company to do so.
- Aflac has been named to the Dow Jones Sustainability Index North America for six consecutive years.
From an industry perspective, Aflac has the opportunity to face regulatory tailwinds from recent proposed deregulation in the banking sector. For now, we’d propose that be only additive to the current investment thesis for Aflac and is not a core focus for our investment these in Aflac.
Aflac Stock Quantitative Review
I really like the financial management of Aflac. The company continues to perform as a best of breed insurer and has demonstrated years of conservatism in financial reporting. Additionally, with at least 25 consecutive years of dividend increases, you know you are in good hands from a return of shareholder capital standpoint.
Over the past 4 years, Aflac has repurchased common stock and paid a dividend at a rate of approximately $2 billion per year.
Source: Aflac Investor Presentation
One area of concern…. Aflac’s dividend payout ratio has increased over time from ~68.1% to ~75.1% in 2017. I think this is somewhat misleading just given the tough operating conditions. During that time period, interest rates were at all-time lows leading to thin net interest margin.
Please note Aflac’s board of directors approved a 2-for-1 stock-split on February 13, 2018. The stock split will be effective on March 16, 2018. Stock splits have no affect on the intrinsic value of the stock. It is truly cosmetic. There is no change to the value of the company. However, the price is usually split to a lower price. This attracts an additional set of investors. A number of retail investors won’t invest in a stock that is greater than $100 because they’d prefer to own more shares. I have no idea why because this is all cosmetic, but this does happen.
Why are stock splits important?
In two separated studies in 1996 and 2003, David Ikenberry (a former finance professor at University of Illinois and current Dean of Leeds School of Business at University of Colorado) analyzed 1,275 stocks that split two-for-one during the 1975-1990 time period. They compared the returns for stocks in the 12 months preceding the split with the returns of the S&P 500 Index. David and his team found that stocks typically outperform the market considerably. Stocks with splits had excess returns of 7.93% in the first year and 12.15% in the first three years.
Yeah, I will be buying before and after the stock split.
Aflac Financial Performance Review
As for financial performance, Aflac has been steady as she goes. Earnings per share increased ~6.2% in 2017 to $3.45 earnings per share from $3.25 earnings per share in 2016. After adjusted for the stock split, this reflects that the stock is currently priced at an approximate 13.3x price to earnings ratio.
For 2018, management expects earnings per share in the range of $3.72 to $3.88 earnings per share, which reflects a increase of 7.8% and 12.5%, respectively. This would imply a forward price to earnings ratio of 12.3x to 11.8x. Not too shabby for a Dividend Aristocrat.
Source: Aflac Investor Presentation
Beyond 2018, I believe Aflac is poised for at least double-digit earning per share growth. Mainly due to the rising interest rate environment. For insurers, premiums received from customers are reinvested into bonds or yield earning assets. When interest rates rise, a company like Aflac will reinvest into higher-yielding assets, which increases profitability.
However, in the short-term, the bonds currently held on balance sheet decline in value due to increase in interest rates. Thus, the true earnings benefit from increasing interest rates will take some time to come to fruition. In the latter years of Aflac’s five-year plan we will see the true benefits of the recent and coming interest rates hikes from the Federal Reserve.
By taking an evidence-based investing approach, I’m able to validate my investment thesis.
Why Invest in Aflac Common Stock
Aflac remains a high quality insurer. I love investing in stocks that have an outstanding track record, but even a better valuation. With Aflac, you can rest easy that your dividend income is safe for the foreseeable future and the upside potential of capital appreciation through earnings growth. I wonder if Motley Fool Stock Advisor agrees?
For dividend growth investors, Aflac is a no-brainer. If you want a visual depiction of how we look for stocks, check out my dividend stock screener infographic.
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Will you invest in this Dividend Aristocrat? How you think about accumulated wealth may surprise you.
Related Resources:
- Dividend Investing Starts with Profit Growth
- McDonald’s Stock Dividend Analysis
- Free Stock Calculator to Help You Invest Smarter
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