Aflac at an Inflection Point - Analyst Blog
March 26 2014 - 3:00PM
Zacks
On Mar 19, 2014, we issued an updated research report on
Aflac Inc. (AFL). This supplemental health and
life insurer has been facing the brunt of a sluggish economy and
low interest rates in Japan – the region that generates about
three-fourth of the company’s total revenue.
Aflac continues to be harshly hit by sluggish sales, portfolio
de-risking, intense economic volatility, and consistent fluctuation
of the yen against the dollar along with changes in interest rates,
credit spreads and defaults. Despite the re-pricing initiatives
taken in Apr 2013, Aflac continues to project deteriorating trends
in the WAYS sales in 2014 as well, after driving a decline of 51.3%
in bank sales in 2013.
The yen/dollar exchange rate was 18.2% weaker in 2013 compared
with 2012, declining operating cash flow and implying deterioration
in the upcoming quarters. These factors coupled with an increase in
Japan's consumption tax coming up in Apr 2014 have further impelled
management to peg its earnings growth guidance in low single digits
in 2014.
Light at the End of Tunnel
Despite weak sales, Aflac has been achieving its earnings target
for the past 24 years, including year 2013. As a result of the
shift to newer products, lower loss ratios, favorable claim trends
and disciplined management of existing accounts and expenses, we
expect the benefit ratio to continue to improve in the upcoming
years as in 2013.
Further, Aflac has been able to maintain healthy capital and
solvency ratios, also supporting its accelerated capital
deployment. Along with consistent dividend hikes for the last 31
years, shares worth $800 million were repurchased in 2013 itself.
Management further aims to accelerate its share buyback target by
$800 million to $1.0 billion in 2014, now that most of the
de-risking program has been successfully completed, thereby
instilling confidence of the rating agencies and of investors in
the stock.
Once the economy treads on a more stable path, we believe Aflac
will be able to gain from the increased client activity and
enhanced group product platform, which will be eventually reflected
in top- and bottom-line growth. Based on these factors, management
also expects earnings growth to gradually rebound 2015 onwards.
Overall, a balanced risk-reward balance in the near term has
lifted the estimate for 2014 by 2 cents per share but have kept the
same intact for 2015 in the past 30 days. The Zacks Consensus
Estimate for 2014 and 2015 now stands at $6.20 a share and $6.61
per share, respectively. However, on a year-over-year basis,
earnings are expected to grow by 0.3% in 2014 and 6.7% in 2015.
Key Picks in the Sector
While Aflac carries a Zacks Rank #3 (Hold), some better-ranked
stocks in the financial sector include Discover Financial
Services (DFS), Unum Group (UNM) and
Tree.Com Inc. (TREE). All these stocks bear a
Zacks Rank #2 (Buy).
AFLAC INC (AFL): Free Stock Analysis Report
DISCOVER FIN SV (DFS): Free Stock Analysis Report
TREE.COM INC (TREE): Free Stock Analysis Report
UNUM GROUP (UNM): Free Stock Analysis Report
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