Aflac’s earnings this week beat consensus estimates by a penny, $1.48 v 1.47, which equates to 2.1% growth . The commentary centered around positive operating execution, small write-offs in the investment portfolio and on-going challenges with global currencies. My sense is that the stock has reacted negatively to CEO comments which reiterated guidance but cautioned that success this year may present growth challenges next year. This means, we sold our butts off and may have actually pulled future sales into the present year. Aflac receives about 75% of revenue from Japan; it may also be the case that the prospect of Shinzo Abe’s election caused companies to ink insurance contracts quickly, before their Yen were devalued.
Aflac certainly has upside growth potential and is relatively cheap, a P/E of around 8.3. Instead of investing more money in a challenging world, the company will invest in itself, announcing $400-600mln of buybacks on top of a dividend that is close to 3%. This is a cash return to equity of 5% in a company with a good credit rating. The Yen exposure and the investment portfolio are our 2 biggest concerns. Aflac has legacy European portfolio exposures. Once considered an extreme negative for the stock, the bad sentiment has abated, this is one reason for its 30% return in the last 7 months. New Chief Investment Officer, Eric Kirsch has been “de-risking” the portfolio slowly and moving toward better currency management. These were both major reasons for our purchase of the stock back in 2011.
Correlations of sales to the USD/Yen exchange rate have been very high for the past 5 years. Better currency management in operations means Yen expenses offset Yen revenue. The addition of currency swaps to partially hedge translation and Yen exposure becomes even less. By the time you account for market expectations, Aflac stock price has very little correlation with the Yen.
Recent weakness and technical headwinds are a concern, but a rising support level is comforting. Any short term weakness would need to be judged relative to the overall market and economy. Absent a storm that sinks ships, I remain upbeat on Aflac.
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For information on Alhambra Investment Partners’ money management services and global portfolio approach to capital preservation, Douglas R. Terry, CFA is reachable at: dterry@alhambrapartners.com
