Enterprise Value = $33.806 billion
Operating Income = $4.586 billion
EV/Operating Income = 7.37x
Earnings Yield = 8%
Price/Revenue = 1.56x
Debt/Equity = 24%
Aflac is an insurance company based in Georgia with a wide presence in the United States and Japan. Aflac underwrites a range of insurance products such as: life, cancer, vision and dental insurance.
Aflac is not a hated stock. In the last year, the stock is up almost 25% and it participated in the S&P’s rally. Despite this, the valuation multiples are still low and it is one of the cheapest stocks in the S&P 500 universe.
Aflac is certainly not the typical kind of company that I buy. There aren’t any glaring problems. I am usually on the hunt for deeply depressed and despised bargain stocks. Aflac is still a bargain, but it’s not something that the market hates. In the current environment, screaming bargains are not easily found.
I’m interested in Aflac from a relative valuation standpoint. Aflac currently trades at a P/E of 12.72. Compare this to the P/E multiples of other insurance companies: Progressive (23.43), Allstate (14.46), Travelers (15.53). Aflac could easily rise to a P/E multiple of 15-20 in the next year.
Aflac is also posting better returns than other insurance companies. Aflac’s return on equity is 13.93%. Compare this to other insurance firms: Progressive (13.52%), Allstate (9.49%), Travelers (12.78%). Aflac is also achieving this ROE result with very little leverage, with a debt/equity ratio of only 24%.
Aflac won’t offer exciting returns (it doesn’t have the potential for massive appreciation like Francesca’s, Big 5, or Foot Locker), but I think it is a safe place to deploy some of my funds in a manner that should outperform the S&P 500 over the next year. It also pays a high dividend yield of 2% (well, high for the S&P 500 universe). In addition to the 2% dividend, they are also buying back shares at a high rate. The common share count has been reduced by 3.47% in the last year. In the last 4 years, they have bought back 14.19% of the common stock.
The enterprise multiple of 7.37 also makes it one of the cheapest stocks in the S&P 500. Some might object to my use of enterprise multiple and price/revenue in my valuation, but I think it makes sense for insurance companies. Insurance companies are really a product of their premiums (revenues), so I think it makes perfect sense to evaluate them based on an enterprise multiple. The balance sheet aspect of enterprise values is also particularly important for insurance companies, as debt relative to cash and assets is a good rough measure of the risks that the insurance company is taking.
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