AFL Stock Evaluation

 

I hope everyone had a great holiday and new year.  Welcome back to the second edition of my "Foundation" stocks section.  For your ongoing reference, I will continue to list the criteria the stocks need to meet to qualify:

Market Cap: Greater than 2 Billion (we don't want our foundation stocks to be smaller companies, as they tend to be less stable)

Price/Earnings Ratio: Under 20 (just a check to make sure the price isn't out of control compared to the earnings - most consistent payers will be around or under this number)

EPS Current: 3+ (solid positive earnings today)

EPS (5 year projection): 3+ (solid positive earnings expected going forward)

History: 20+ years of increasing dividends at least once per year (we want companies that have shown the ability to keep payments increasing through recessions)

Dividend Increases: 1,3,5 year increases all over 5% (we want our dividend growing at a sufficient rate to outpace inflation)

Payout Ratio: Under 70% for the last 5 years (provides a safety net to afford payments in low earning years and allows for room to increase dividends going forward)

 

And with that...

 

Aflac-logo

 

Description From Google Finance:

Aflac Incorporated (Aflac) is a business holding company. The Company is engaged in supplemental health and life insurance, which is marketed and administered through its subsidiary, American Family Life Assurance Company of Columbus (Aflac). Aflac offers insurance policies in Japan and the United States that provide a layer of financial protection against income and asset loss. Aflac's insurance business consists of two segments: Aflac Japan and Aflac U.S. Aflac Japan sells voluntary supplemental insurance products, including cancer plans, medical indemnity plans, medical/sickness riders, care plans, living benefit life plans, ordinary life insurance plans and annuities. Aflac U.S. sells insurance products, including products designed to protect individuals from depletion of assets, such as accident, cancer, critical illness/care, hospital intensive care, hospital indemnity, fixed-benefit dental and vision care plans, and loss-of-income products.

Description In Non-Business Jargon:

Aflac is the huge insurance company with that obnoxious duck on the commercials.

Basic Statistics

 

MARKET CAP25 BILLIONEPS GROWTH (5 YR EST)8.92%
CURRENT PRICE59.28PEG
1.16
CURRENT P/E10.39PEGY0.89
CURRENT EPS5.71BETA1.53

 

P/E Under 20: Check. Well under 20 provides us with some assurance that we aren't paying too much of a premium compared to earnings.

EPS Current + Projected both over 3: Check. Earnings are high now and there is some optimism for even further growth seen in the 8.9% growth projection.  

PEGY: I didn't set a criteria with PEGY, but it can still work as a positive for some companies.  The fact that AFL is under 1 is a great sign for the stock's current value.  It says we are paying less than $1 for every dollar of future growth and dividend payouts.  It really seems like there is some room to grow here within the price of the stock.

Dividend Information

 

DIVIDEND AMT$0.41DIV GROWTH - 1 YR5.4%
DIVIDEND YIELD2.77%DIV GROWTH - 3 YR
6.8%
PAYOUT RATIO28.7%DIV GROWTH - 5 YR6.5%
HISTORY32 YEARSPAYOUT RATIO (prev 4 years)23%, 21%, 22%, 30%

 

History: Check. 32 years of growth, which takes us safely through a few recessions.

Dividend Yield: Check. Over our 2.5% threshold.  2.77% is a pretty average payout.  It's not what I would call exciting, but what excites me about AFL is how undervalued the price seems.  Still we have a steadily increasing dividend that we can rely on.

Dividend Increases: The increases aren't huge, but they are still well outpacing inflation.  We aren't necessarily looking for the highest dividends in our foundation stocks, we are more looking for reliability.  Aflac's dividend increases are reasonable and we can rely on them to keep paying us every quarter.

Payout Ratio: Check. These are simply great payout ratio numbers.  Sub 30% means plenty of room for increases and a big safety net for low earning years (which we hope we don't experience).  An increasing dividend for 32 years with a sub 35% payout ratio seems as safe as they come.  Sure, the dividend is less than 3% and the increases haven't been huge recently, but when we have a reliable payout like this, its easy for us to sleep easy at night knowing our payments should continue to come.

$1000 Invested in January 2011

 

Obviously, this section doesn't do us any good if we DIDN'T invest $1000 in January 2011, but I figured it would give you an idea of how the stock has paid off in the recent future.  Don't read too much into this, as it serves as mostly motivation to begin investing as soon as possible and let time in the market work in your favor.

Present Value (as of 12/23/2015) = $1,217 with dividend reinvestment for an average return of 4.01% per year.

Summary

 

This section was originally labeled "Optimal Price Range" but I'm quickly realizing these are more of "buy at any price" stocks.  Given the stability of these foundation stocks, the prices don't fluctuate as much as others where we'd have to dive deeper into what prices to look for.  For the most part, the prices continue to rise slowly over time, instead of jumping up and down drastically, which makes current price less important than the fundamentals. 

Safety comes in a few varieties, last post we saw Johnson & Johnson (JNJ) had already undergone a drastic price increase and the most of its value at the present price was in its stability.  This was seen with a relatively high PEGY ratio and the high return from an investment made in 2011.    

Although I can't emphasize enough that we can never predict what a stock will do in the future, AFL seems to be firmly in a stage before Johnson & Johnson (JNJ).  There has been a somewhat limited return in the last 5 years at 4% annually, but there have been steady dividend payments and the PEGY ratio now sits at under 1.  That seems to be a signal that people will begin paying a premium for the stability of an increasing dividend, with high earnings and a low payout ratio.  I feel confident holding this stock for the long haul, and with the numbers I see, I'm holding out hope for the large price growth potential.  There is also plenty of room for dividend increases WITHOUT earnings growth due to a payout ratio under 30%.  

Right now my plan is to build my AFL position up to 6% of my total portfolio and let it do its thing.

I'll be posting these evaluations on several other companies in the next few weeks to round out my choices.  These companies should provide a nice start to anyone wanting to begin their portfolio or transition to dividend investing.

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http://monthlycents.com/2015/12/29/afl-stock-evaluation/

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