Has Aflac Become the Perfect Stock?
Nov 16th 2011 2:17PM
Updated Nov 16th 2011 2:22PM
Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?
One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Aflac (NYS: AFL) fits the bill.
The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:
- Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
- Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
- Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
- Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
- Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
- Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.
With those factors in mind, let's take a closer look at Aflac.
|Growth||5-Year Annual Revenue Growth > 15%||8.2%||Fail|
|1-Year Revenue Growth > 12%||7.1%||Fail|
|Margins||Gross Margin > 35%||25.1%||Fail|
|Net Margin > 15%||8.6%||Fail|
|Balance Sheet||Debt to Equity < 50%||33.0%||Pass|
|Current Ratio > 1.3||0.42||Fail|
|Opportunities||Return on Equity > 15%||15.6%||Pass|
|Valuation||Normalized P/E < 20||11.79||Pass|
|Dividends||Current Yield > 2%||3.0%||Pass|
|5-Year Dividend Growth > 10%||19.1%||Pass|
|Total Score||5 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Aflac's score of five is the same it earned when we looked at Aflac last year. A lot has happened to the insurance company, but its financial numbers look quite similar.
Aflac's spokesduck is popular in the U.S., but what many investors don't realize is that Aflac is a truly global company. Aflac gets more than three-quarters of its revenue from Japan.
Moreover, Aflac distinguishes itself from health insurers like UnitedHealth (NYS: UNH) and WellPoint (NYS: WLP) by focusing on supplemental products rather than core health coverage. That not only gives the company different exposure to risk but also opens new opportunities, especially as health-care reform both in the U.S. and abroad leads to a shifting landscape for what's covered and what isn't under traditional health insurance policies.
But Aflac's international reach has also left it exposed to risks. Although the Japanese earthquake and tsunami didn't hurt it as much as peer MetLife (NYS: MET) , which carried more property risk, Aflac still took a hit along with Prudential (NYS: PRU) because of their health-care coverage. Moreover, Aflac's holdings of European sovereign debt have thrown a wrench into its finances going forward -- although the company survived and thrived after a similar scare two years ago.
Just like fellow insurers like Markel (NYS: MKL) , Aflac makes money from the float between when it receives premiums and when it has to pay out claims. Its long-term investment success has allowed the company to increase its dividends every year for nearly three decades.
With CEO Dan Amos at the helm, Aflac has consistently gotten through difficult times in the past. With the right strategy going forward, Aflac should be able to start marching upward toward perfection in the near future.
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.
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Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our " 13 Steps to Investing Foolishly ."
At the time this article was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Markel, AFLAC, and UnitedHealth Group. Motley Fool newsletter services have recommended buying shares of Markel, AFLAC, WellPoint, and UnitedHealth Group, as well as creating a diagonal call position in UnitedHealth Group. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.
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