Aflac Well Poised On U.S. Unit, Currency Volatility Hurts

Aflac Inc. (NYSE:AFL) boasts an excellent franchise and strong market position in supplemental health insurance in both Japan and the U.S.

During the most recently reported quarter, the company’s earnings surpassed the Zacks Consensus Estimate and grew year over year, driven by favorable performance by its U.S. business along with share buyback. The 2017 guidance (earnings per share between $6.40 to $6.65 ) was also reaffirmed.

Aflac U.S. continues to perform strongly as evident by increasing revenues since 2010 (CAGR of 3.1%) and the trend continued in the first half of 2017 (total revenue up 1.8%). The company has undertaken a number of growth initiatives in this segment, which will further drive up its revenues.

The company’s strong financial position and disciplined capital management are impressive. It has been increasing dividend for the past 34 years. The company intends to increase its dividend for the 35th time this year. Its dividend yield of 2.13% compares favorably with the industry’s dividend yield of 1.99%. It recently authorized a new share buyback plan of 40 million shares.

The company’s stock has gained 16% year to date, outperforming the 14% rally of the industry it belongs to. Given its favorable 2017 earnings guidance and progress on fundamentals, we expect the stock to continue to perform well in the coming quarters.

Nevertheless, persistent low interest rates in the region have put pressure on revenue growth from Japan business. In order to fight with this, the company has deemphasized sales of first-sector (life insurance) products in the region, which has created a dent in revenues from the segment to some extent.

Aflac is in the process of converting its Japan branch into a subsidiary, which will provide it enhanced business flexibility. The company expects to incur conversion costs of $120 million to $130 million pretax through mid-2018. These costs will hurt the company’s margins in the coming quarters.

Given that the company derives almost 70% of total revenues from Japan, it is greatly exposed to foreign currency volatility. A weaker yen hurt second-quarter results by 2 cents a share when compared to the year-ago quarter. Its pre-tax hedge cost guidance remains in the $250–$270 million range for 2017. These costs will put pressure on the company’s bottom line.

Aflac carries a Zacks Rank #3 (Hold). Some better-ranked players in the space are Amerisafe, Inc. (NASDAQ:AMSF) , Employer Holdings, Inc. (NYSE:EIG) and Unum Group (NYSE:UNM) . Each of these stocks carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Amerisafe’s second-quarter earnings beat the Zacks Consensus Estimate by 13.9%.

Unum beat estimates in each of the last four quarters with an average positive surprise of 3.1%.

Employer Holdings beat estimates in each of the last four quarters with an average positive surprise of 27.9%.

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