Summary
- Aflac is trading slightly above fair value.
- It remains a very attractive Dividend Aristocrat.
- The exposure to Japan is a considerable risk at this point.
Aflac (NYSE:AFL) is currently trading above fair value, but this top-ranked supplemental insurer and Dividend Aristocrat is nonetheless still worth considering as a viable long-term investment.
That Aflac is trading above fair value is not really a matter of dispute. After all, although the stock currently trades at a discount to the S&P 500 (SPY) average of 23.05, it currently trades at a price of $53.17 with a price-to-earnings ratio of 13.10, which is quite a bit above its five-year average P/E ratio of 10.70. Furthermore, its current dividend yield of 2.03% is quite a bit below its five-year average dividend yield of 2.26%. These figures alone suggest it is at a valuation that is somewhat higher than may be merited. But, by how much?
In determining fair value, I use the following four-step process. First, I divide the current P/E of 13.10 by the historical market average of 15 to get a valuation ratio of 0.87 (13.10/15 = 0.87). I then divide this valuation ratio by the current share price of $53.17 (53.17/0.87 = 61.12). This first step gives us a figure of $61.12.
Next, I divide the current P/E by the five-year average P/E of 10.70 to get a valuation ratio of 1.22 (13.10/10.70 = 1.22). I then divide this valuation ratio by the current share price of $53.17 (53.17/1.22 = 43.58). This second step gives us a figure of $43.58.
Then, I divide the five-year average dividend yield of 2.26% by the five-year average dividend yield of 2.03% to get a valuation ratio of 1.11 (2.26/2.03 = 1.11). I then divide this valuation ratio by the current share price of $53.17 (53.17/1.11 = 47.90). This third step gives us a figure of $47.90.
Finally, I find an average of the three figures generated in the preceding steps to derive a final figure: (61.12 + 43.58 + 47.90)/3 = 50.87. Therefore, I calculate fair value for Aflac at $50.87, 4.33% below its current share price of $53.17.
Now, this may not seem like much of a problem for a prospective investor, as Aflac has plenty of attractive aspects to it. The business model of Aflac remains a sustainable one: the insurer takes on businesses as clients, offering the employees of said businesses the choice of purchasing Aflac insurance via payroll deductions, be it coverage for accidents, critical illness, dental treatment, short-term illness or vision-related problems. The insurance they offer is supplemental, which has the advantage of being less vulnerable to government regulation than other types of insurance. And, of course, there is the famous duck mascot, which has made the Aflac brand a prominent one in the U.S. and Japanese markets in which it operates.
Aflac's duck mascot has provided the supplemental insurance provider with great brand recognition in the U.S. and Japan. Image taken from Aflac.
The revenue and net income figures over the past five years reflect the viability of the Aflac business model. While these figures may appear somewhat lumpy, one must take into account the conversion of Japanese yen into the dollar-denominated figures reported.
