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.

The share repurchase total (13.2 million in 2013 and 49.2 million shares to come) would reduce outstanding shares by around 7.3%. That contributes to the upside stock price potential as the dilution decreases.

However, although the yen may stabilize against the dollar, Aflac still faces some headwinds in Japan during 2014.

These include a difficult low-interest-rate environment, sizable expenditures in both Japan and the U.S. to enhance its operational infrastructure, and an increase in Japan's consumption tax -- rising from 5% to 8% starting in April. That's why the company's guidance for 2014 was cautious.

During its last earnings report on Feb. 4 Aflac reaffirmed its 2014 operating EPS guidance and offered an optimistic outlook for 2015, when these headwinds diminish significantly. Aflac knows it is well-positioned in the two best insurance markets in the world, the U.S. and Japan. It's expanding its insurance products judiciously and building on its outstanding reputation as a supplemental insurance provider.

With the prospect of another year with an increased dividend, its stock repurchases and proactive leadership, shareholders will have plentiful reasons to smile.

At the time of publication the author had no positions in AFL.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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Marc Courtenay is the founder and owner of Advanced Investor Technologies, LLC, as well as the publisher and editor of www.ChecktheMarkets.com.

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