The capital allocation for the week of 01/03/2021 to 01/09/2021 will be used to establish a position in Aflac Inc (NYSE: AFL) in the FiveTwenty portfolio.
| Past Week Dividend | $0 |
| Current Quarter Dividend (Q1 2021) | $0 |
| LifeTime Dividend | $0 |
AFL – Company Profile
Aflac Inc. (AFL) is an American insurance company. The company provides supplemental health and life insurance products in Japan and U.S. Through its 2 subsidiaries in Japan and the U.S., AFL is providing coverage to more than 50 million people. Wikipedia
On November 18, 2020 AFL announced an 18% increase in its quarterly dividend. It increase the Q1 2021 dividend to $0.33 per share from the previous value of $0.28 per share.
| Dividend Streak | 38 years |
| Yield | 3.06% |
| Payout Ratio | 25.22%* (reported 17.30%) |
| P/E | 9.77* (reported 6.95) |
* numbers were calculated based on EPS from operations (see “Financials” section for explanation)
Financials
As previously mentioned, AFL operates in the U.S. and Japan. With Aflac Japan accounting for roughly 70% of the companies revenue, AFL’s financials will be always be impacted significantly by fluctuations in the exchange rate between the U.S. dollar and the Japanese yen. In both countries, AFL has two sources of income: income from premiums and income from investments.
Over the last 10 years, AFL’s revenue has fluctuated between $20 and $25 billion. It has not shown any clear upward trend. Net income on the other had show a small increasing trend over the decade.
On the other hand, AFL has been able to consistently grow EPS over the last decade. Coupled with a historical payout ratio of around 25%, the companies focus on growing EPS should allow it to sustain it’s dividend payouts into the future.
For 2020, AFL has seen it sales results impacted by the COVID-19 pandemic. The pandemic has increased near term uncertainty for the business. To respond to this the company is offering a voluntary separation plan which it expects to cut its workforce by 9% and accelerated investments in digital and automated platforms.
On a different note: in Q3 2020, AFL’s net earnings were boosted by a $1.4 billion tax benefit due to newly released U.S. tax regulations. This one time event had a outsized impact on the TTM EPS, P/E, and payout ratio. Excluding this one time event, EPS for Q3 2020 are estimated to be $1.45. Therefore, the actual TTM EPS, P/E, and payout ratio for AFL are $4.42, 9.77, and 25.22% respectively.
Valuation
Are we paying too much for AFL at the current share price?
AFL has seen a year end P/E ratio low of 7.17 (Dec 2011) and a high of 11.64 (Dec 2019). The “actual” TTM P/E ratio of 10.01 is about the average P/E over the period.
The current stock price of $43.19 is 2.6% above the 50-day moving average and 14.7% above the 200-day moving average. Additionally, the stock price is near the 70 percentile of the 52 week trading range. While the stock price has seen a runup during November 2020, it is still below the February 2020 levels (pre COVID-19 market crash).
Overall, AFL shares offer an attractive entry point.
Yield
How does the current dividend yield for AFL compare to historical values?
Over the last decade, the dividend yield for AFL has fluctuated between a low of 1.98% (November 2019) and a high of 3.24% (May 2020). The TTM yield of 2.54% is still higher then the median seen over the period. And the forward looking yield of 3.06% after the dividend increase announces for Q1 2021 is right there at the top of the range.
Thesis
Why are we adding AFL to the FiveTwenty portfolio?
AFL has a long track record of solid performance as a business. It has done an exceptional job managing it’s dividend payout for a long time. The current combination of yield, payout ratio, and valuation makes it an attractive entry point.
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