4 reasons to buy this dividend aristocrat today
Despite numerous market corrections during my investing career, I have been able to live my life without panicking in the face of market volatility. This is because my portfolio is made up of stocks that tend to hold up better than the broader market in times of high stress.
A core holding in my portfolio that has made this possible is the supplemental insurer Aflac (AFL -1.73% ). For example, while the S&P500 the index has fallen 9% since the start of the year due to rising inflation and economic turmoil linked to Russia’s invasion of Ukraine, Aflac’s stock has in made resurrected 5% so far in 2022. Despite Aflac’s recent strong price performance, the stock remains a buy for investors seeking stability in a market currently plagued by uncertainty.
Here are four reasons why Aflac is a good buy right now.
1. Aflac Consistently Exceeds Analyst Expectations
When Aflac announced its fourth quarter results on Feb. 2 for the period ending Dec. 31, the company beat analysts’ average forecasts for non-GAAP (adjusted) earnings and diluted earnings per share (EPS).
Aflac reported revenue of $5.43 billion in the fourth quarter, an 8.1% decline in revenue year-over-year. But that total still managed to beat analysts’ forecast of $5.24 billion in sales for the quarter. How did Aflac beat the analyst earnings consensus for the seventh quarter of the last 10?
Two key factors led to lower year-over-year revenue for Aflac in the fourth quarter.
First, the COVID-19 pandemic negatively impacted revenues in the United States and Japan (where it primarily operates). Total US revenue increased another 0.1% to $1.6 billion in the quarter. A 1.3% decline in net earned premiums in the US due to lower in-person sales was more than offset by an 8.2% increase in adjusted net investment income for the quarter. In Aflac’s Japan segment, a 16.8% increase in adjusted net investment income was not enough to offset the 4.3% decline in net premiums earned (also due to limited face-to-face sales ) recorded in Japanese yen in the fourth quarter. Total revenue in Japan fell 8.5% year-over-year to $3.6 billion in the fourth quarter.
Second, Aflac’s revenues were negatively affected by unfavorable foreign currency translations. This is because Aflac earns a significant portion of its revenue in Japanese yen and then converts those yen into US dollars. And the average exchange rate deteriorated 8% in the fourth quarter to 113.70 yen per dollar from the previous year’s average exchange rate of 104.57.
While revenues were under pressure in the fourth quarter, Aflac’s profitability remained strong due to lower claims resulting from the effects of the pandemic. As a result, the company’s adjusted diluted EPS increased 19.6% year over year to $1.28 in the fourth quarter. That narrowly topped the analyst consensus of $1.26, marking the 20th consecutive quarter that Aflac has been able to do so.
2. Interest rate hikes will boost business
Aflac delivered a solid fourth quarter to its shareholders. And with the Federal Reserve expected to raise interest rates this year, Aflac will benefit as part of its $143 billion investment portfolio is invested in US bonds. This will allow the company to purchase higher yielding bonds and increase its investment income in the future.
3. Dividend growth has accelerated in recent years
Aflac has increased its dividend paid to shareholders every year for 39 consecutive years, making the stock a well-established dividend aristocrat. For a stock with such a long history of increasing its dividend, a reasonable investor would expect dividend growth to slow.
But Aflac’s most recent 21.9% increase in its quarterly dividend per share to $0.40 per share per quarter was the largest percentage increase since its 20% dividend hike in 2008. Why the board of directors confident enough to distribute a massive dividend increase to its shareholders? And can Aflac’s anti-inflationary dividend growth continue?
For one thing, Aflac’s dividend payout rate in 2021 was only 22.2%. This gives the company leeway in terms of increasing dividends. Second, analysts expect Aflac’s earnings to grow by about 10% per year over the next five years. These two factors should allow the healthy dividend growth to continue for the foreseeable future. Best of all, this growth will come on top of a market-beating 2.6% dividend yield.
4. Aflac is trading at an attractive valuation
The final reason to consider buying Aflac is its valuation. Aflac’s forward price-to-earnings ratio of 10.9 is slightly below the insurance industry average of 12.4. Given its quality, I think Aflac deserves to trade at a slight premium to his peers.
Aflac also appears to be cheap based on the fact that its price-to-book (P/B) ratio of 1.2 is lower than its 13-year median P/B ratio of 1.4. Given that Aflac’s fundamentals appear solid, it looks like a good buy for long-term investors.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.