Get All Your Ducks in a Row With This Dividend Aristocrat

Investors looking to reduce volatility and improve long-term returns should consider high-quality dividend growth stocks. Many stocks pay dividends, but few have maintained long histories of raising their dividends each year. This is why we point income investors toward the various lists of long dividend increases, such as the Dividend Aristocrats. One name to consider is Aflac , a Dividend Aristocrat with a 3% yield. It also appears to be undervalued, with a low valuation multiple that has room for expansion. Overall, we find Aflac to be among the most undervalued Dividend Aristocrats. The Dividend Aristocrats are a group of 65 stocks in the S&P 500 Index with 25-plus consecutive years of dividend increases. We believe buying and holding the best dividend growth stocks such as the Dividend Aristocrats, can generate superior long-term returns. Even better, sometimes Dividend Aristocrats go on sale. This Business Is Nothing to Quack At Aflac Inc., founded in 1955, is the world's largest underwriter of supplemental cancer insurance. The diversified insurance corporation also provides accident, short-term disability, critical illness, dental, vision, and life insurance. Roughly 70% of the company's pretax earnings are from Japan, with 30% coming from the U.S. This exposure to Japan presents currency risk. Aflac's earnings will fluctuate, in part based on exchange rates between the Japanese yen and the U.S. dollar. When the yen rises against the dollar, it helps Aflac because each yen earned becomes more valuable when it is reported in U.S. dollars. Aflac's strategy is to increase premium growth through new customers, as well as increase sales to existing customers. It is also investing to expand its distribution channels, including its digital footprint, in the U.S. and Japan. Aflac continues to perform well overall. On Oct. 27 Aflac released Q3 2020 results showing it reported $5.67 billion in revenue, representing a 2.3% increase compared to Q3 2019. Net earnings equaled $2.46 billion, or $3.44 per share, compared to $777 million, or $1.04 per share, in the year- ago quarter. But this included a $1.4 billion benefit related to the release of deferred tax benefits. Still, even on an adjusted basis, earnings-per-share equaled $1.39 vs. $1.16 in Q3 2019. This represented an earnings growth rate of 20% year-over-year. Aflac has a long runway of growth up ahead, due to new products, cost cuts, and the benefits of share repurchases to boost earnings growth. Growth Prospects Aflac has generated strong growth in the years following the Great Recession. From 2007 through 2019, Aflac grew earnings-per-share by an average compound rate of 8.7% per year. The company has a positive growth outlook going forward, driven by further expansion in the U.S. and Japan. In the U.S., Aflac's strategic priority is to grow earned premiums by a compound annual rate of 2% to 2.5% through 2025. Cost reductions are also part of the profit growth plan for the U.S., as Aflac expects to reduce run-rate annual costs by $200 million. Specific growth drivers include Aflac's digital services, as well as dental and vision policies. In Japan, Aflac is seeing success with its rollout of third-sector insurance. These are products that include non-traditional products such as cancer insurance, as well as medical and income support. Aflac has enjoyed strong demand in Japan for third-sector products, due to the country's aging population, and declining birthrate. The third-sector market in Japan has more than doubled in the past 15 years. Branching out into new categories is also part of Aflac's growth plan. It recently broadened its reach to include pet insurance with its $200 million investment in Trupanion, which gave Aflac a 9% investment stake. The investment will allow Trupanion to perform product underwriting, administration, and customer service, while selling Aflac-branded pet insurance in the United States. Investment Case For Aflac Insurance stocks are attractive for investment, because the insurance industry enjoys favorable economics. Insurance companies make money in two ways. First, they collect income from policy premiums; but they also make money by investing the large sums of accumulated premiums that have not been paid out as claims (known as the float). As a result, insurance companies benefit from multiple revenue streams. And, since well-run insurance companies benefit from a low cost structure, the insurance business model generates excess cash flow. Shareholder-friendly companies like Aflac consistently return excess cash to investors, through share buybacks and dividends. Even in 2020, Aflac has continued to reduce its share count with effective buybacks. The company lowered its diluted share count by 4% over the past year. Aflac also recently increased its dividend by 18%, a very strong raise given the difficult economic conditions throughout 2020. Aflac has now increased its dividend for 38 years in a row, a long period of time that has encompassed multiple recessions. Aflac stock yields nearly 3%, and with a proven track record of annual dividend increases, Aflac stock is attractive for income investors. Aflac stock also appears to be reasonably valued. Shares trade for a price-to-earnings ratio below 10. This is an attractive entry point for a highly profitable company with a 3% yield and a long history of dividend increases. Investors should consider high-quality dividend growth stocks, particularly when the economy is in recession. Blue-chip dividend payers provide shareholders with consistent dividend income, regardless of the state of the markets or the broader economy. And, thanks to their long-term growth and global competitive advantages, high-quality dividend stocks like the Dividend Aristocrats are usually quick to bounce back once a recession is over. Aflac has a strong brand and a long history of rewarding shareholders with annual dividend increases. The stock could generate strong total returns, and the stock is a buy for value and income investors.

Get All Your Ducks in a Row With This Dividend Aristocrat

Aflac is a dividend aristocrat that offers a safe yield and strong total returns.

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