AFLAC is a well-known insurance company founded in 1955 year. Company operates mainly in Japan and U.S. Most of operating profits are generated in Japan.

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This is important and investors should take into account JPYUSD exchange rate. JPY was very weak for the last four years but at the beginning of 2016 some rays of hope appeared.

Company is heavily related on global financial markets. As we can see most of invested assets are fixed maturities, while Japan 10Y Bond Yield and LIBOR in Japan is around 0. Not so much potential for fixed income instruments to appreciate.

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For me buying AFLAC is being long on debt markets. Quite risky in long term. Company is struggling with low yields all around the world and responded by buying instruments with lower ratings (compare 2010 vs 2015). When things go ok it is not a problem, but…

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As it comes to financials (estimates):

Market cap ~ $25B

Net debt ~$5B

Payout ratio ~25%

Beta = 1.5

Dividend yield 2.8% + buyback around 5% in 2015

 

Estimated valuation ratios:

EV/EBITDA = 6.4 (weak indicator for insurance companies)

P/E = 9.4

 

AFLAC (AFL) is one of The Dividend Aristocrats with history of increasing dividend payments since 1983 year. Currently dividend yield is around 2.8%  – good result, especially if we also consider buyback 5%. Historically dividend yield for AFLAC was around 2-3%. OK.

 

Drawdown risk analysis:

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Drawdown is not so high, but we should consider that share price was flat for more than 2 years. Moreover valuation is not high. On the other hand insurance businesses are heavily invested in bonds and equities. Currently yields on bonds are low and I see higher potential for increase of interest rates than decline to negative numbers. This can deteriorate investment results of AFLAC. The same story is with equities, but the amount of equities in AFLAC portfolio is small. Generally speaking I think that shares are rather expensive (see on my valuation list where I see fair long term value for many companies, 15-20% lower than currently). So I think that current price for AFLAC is around fair, but I do not feel it is a strong buy. $50 would be a strong buy for me.

 

Summing up, AFLAC is a high quality company, with not so high valuation but I am afraid of global debt markets. For me it is a bubble and company is heavily exposed.

 

Disclaimer AFL – no position