Aflac Upped to Outperform - Analyst Blog

On Thursday, we upgraded our recommendation on the shares of Aflac Inc. (AFL) to Outperform from Neutral based on its recent dividend hike coupled with the resumption of its stock buyback program, reflecting a fair liquidity and retaining investors' confidence.

Besides, Aflac's third quarter per share of $1.45 came in modestly ahead of the Zacks Consensus Estimate of $1.39 and also compared favorably with earnings of $1.25 in the year-ago quarter. Earnings for the reported quarter benefited from a top-line growth of 19% year over year and a stronger yen/dollar exchange rate that helped increase operating earnings per share by 7 cents.

Aflac has been achieving its earnings target for the last 20 years, which is reflected in its consistent dividend increment. Maintaining this trend, in August 2010, Aflac hiked its fourth quarter dividend by 7.1% to 30 cents from 28 cents per share. This marks the 28^th consecutive year of dividend increment.

Moreover, given the slow and steady improvement in financials based on the ongoing economic recovery, Aflac has been able to maintain a strong balance sheet position along with a minimum risk exposure. These factors have helped the company resume the share buyback program that it had shelved in 2008, at the peak of the financial crisis.

Currently, Aflac had 32.4 million shares available for buyback, which it expects to repurchase in the fourth quarter of 2010. Alongside, Aflac projects to repurchase another 6-12 million shares in 2011.

Besides, A.M. Best has recently assigned a debt rating of a- for Aflac's newly issued long-term senior unsecured notes and affirmed the same for other debt securities, thereby reflecting a stable outlook based on Aflac's present financial leverage that is estimated to be around 25%, consistent with the rating category criterion.

Going forward, the net proceeds from these notes issue are expected to be utilized in reducing debt obligations, funding the share repurchase program and other corporate expenses, thereby increasing the operating leverage without posing much risk to the capital.

Since 2009, Aflac experienced strong agency recruitment and increased the number of banks that offer products to their customers. Once the economy treads on a more stable path, we believe that the company will be able to gain from the increased client activity, which will be eventually reflected in the top- and bottom-line growth.

Further, the company's benefit ratio has declined over the past several years, reflecting the impact of newer products with lower loss ratios. As a result of the shift to newer products and the impact of favorable claim trends, we expect the benefit ratio to continue to improve in the upcoming years.

Although higher operating expenses and a decline in annualized ROE pose risk to growth, operation in Aflac Japan continue to drive the growth momentum. Alongside, Aflac U.S. is also improving gradually although the recovery remains sluggish. However, Aflac's prime peer, Catalyst Health Solutions Inc.'s (CHSI) operating expenses increased significantly during the third quarter of 2010.

 

Hence, though we remain cautious on the near term outlook, we remain confident about the fundamental outlook for Aflac, especially in Japan. Thus we expect some upward potential pressure on the performance of the stock in the medium-to-long term once the global economy rebounds to its historical highs.

 

On Thursday, the shares of Aflac closed at $53.60, up 0.04%, on the New York Stock Exchange.

 
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