Aflac: Best-in-Breed, Limited Downside Risk

NEW YORK (TheStreet) -- It's easy to like a public company that raises its dividend for 31 years in a row, and that's why I like Aflac (AFL), a dominant player in the supplemental insurance industry with one of the strongest distribution networks of any insurer today.

Aflac is an example of a best-in-breed stock for investors who like rising annual dividends and the potential for growth in a sector with plenty of staying power. Buy it at the right price and with a little patience the total return potential should be rewarding, with limited downside risk.

The Columbus, Ga.-based company provides supplemental health and life insurance products. It's the #1 U.S. provider of supplemental health insurance sold at places of employment. It's also the largest international insurer in Japan, where it derives about 80% of its earnings and more than 75% of its revenue.

For shareholders, Aflac offers a competitive dividend yield and a generous, ongoing stock buyback program. The combination of an increasing dividend and a stock buyback program is referred to as "shareholder yield," an important component in an investment's total returns. Shares are currently down 2.9% for the year to date as of the Wednesday close of $64.

If you buy AFL shares at $64, your yield-to-price would be 2.31%. According to Yahoo! Finance, the estimated one-year target share price is $71. So let's do the math.

Purchasing at $64 with a one-year target price of $71 equates to nearly an 11% potential gain. Plus, you'll be paid a dividend of 37 cents per share each quarter for staying invested. With Aflac's history, the dividend may be increased the first year you own it, and your yield moves even higher. 

Investors who don't overpay for a stock will like that Aflac trades at a forward (one-year) PE ratio of less than 10. Then there's the company's share-buyback program.

In the fourth quarter of 2013, Aflac repurchased $502 million, or 7.6 million shares, of its common stock. For all of last year the company purchased $800 million, or 13.2 million, of its shares. At the end of December, the company had 49.2 million shares available for purchase with its current buyback authorization.

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