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Chubb vs. Aflac: Which of These Dividend-Paying Stocks Is Best?

NEW YORK (TheStreet) -- Insurers Chubb (CB - Get Report) and Aflac (AFL - Get Report) are rare stocks in today's market: high-quality businesses that trade at relatively cheap prices. But which will reward shareholders the most in the coming years?

Based on my criteria for dividend investing, Chubb is better for risk-averse investors, while Aflac is better for those who can withstand large price swings. Both make excellent investments for long-term shareholders interested in income and growth.

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Chubb operates in three divisions: personal insurance (37% of revenue), commercial insurance (43% of revenue), and specialty insurance (20% of revenue). Chubb's conservative management is recognized as among the best in the industry.

The company has maintained a combined ratio of less than 100% since 2002. The combined ratio is expenses and claims paid divided by premiums received; it measures the profitability of an insurance company's operations before investment income. Chubb has been highly profitable for more than a decade, which is rare in the fiercely competitive insurance industry.

Chubb is undervalued relative to its peers in the large-cap property and casualty insurance industry. Its peer group has an average price-to-earnings ratio of 13.53, while Chubb has a P/E ratio of less than 11.3, which implies 20% upside at current levels. The overall insurance industry is trading at a significant discount to the market as a whole. The S&P 500 has a P/E ratio of about 19.

Aflac is more than an obnoxious white duck. The company is the leading cancer insurer in Japan, where it generates about 73% of its revenue. Aflac gets the remaining 27% of its revenue from the U.S. It's heavily exposed to fluctuations in the yen-to-dollar exchange rate, which has negatively affected the company's U.S.-denominated earnings and pressured it stock lower.

Aflac is significantly undervalued compared to other accident and health insurers. The average P/E ratio for medium- and large-cap health insurers is 12.2. Aflac has a P/E ratio of less than 10. The company is trading at a 25% discount to other accident and health insurers. Aflac will likely see its P/E rise when the yen begins to appreciate vs. the dollar. In the meantime, shareholders get paid an annual dividend yield of 2.4% to wait.

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Fundamental Analysis

Both Chubb and Aflac have a long history of annual dividend increases. In fact, both have raised their dividends for 32 years in a row. Shareholders have come to expect yearly dividend increases from both companies due to their consistent growth.

Chubb has a dividend yield of 2.2%, while Aflac has a dividend yield of 2.4%. Not only do Aflac and Chubb have similar yields and dividend histories, they also have similar payout ratios. Aflac has a payout ratio of 23%, vs. 22% for Chubb. Both companies' conservative payout ratios give them significant room to increase dividends faster than overall company growth in the future.

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