Without a doubt, one of the most successful investors in history is Warren Buffett. His investment acumen is legendary. One of his favorite types of business to invest in has been insurance. Insurance companies operate on float. They take in money from customers who are looking to mitigate certain risks, and they don’t have to pay out that money, sometimes ever.
Life is full of risks, such as death, disease, and accidents, and people frequently want to plan for these eventualities that often show up unexpectedly. Insurance companies take in premiums and then pool the funds to pay out when consumers file a claim. This money doesn’t just sit in a low-yield savings account, though. Insurance companies invest the funds while they wait to pay out claims.
Frequently, consumers will wait years, or even decades to need to file a claim, while they continue paying premiums that insurance companies are able to invest and grow. Sometimes, consumers will decide they no longer need to mitigate a certain risk, or they will decide they can no longer afford to pay the premiums. While there are some exceptions like whole life policies that provide a cash value, those consumers will usually not see the return of their premiums when they quit paying. This means the insurance companies have really cashed in. The float can lead to a massive pile of cash for insurers and those who invest in them.
One such insurer that’s had a strong history of paying off for investors is Aflac (NYSE:AFL). Aflac has paid off for both dividend investors and growth investors over the long run, and it’s outperformed the market this year.
Aflac offers a strong stable of insurance products. In addition to traditional life insurance, the company is well-known for its supplemental insurance products. Aflac has operations in the US and Japanese markets. Multiple employers I’ve had have offered Aflac products, and while I haven’t purchased them, I have had colleagues who have. Their hospital insurance paid out, even though one colleague had traditional medical coverage.
There is a huge market for the products Aflac offers, and many people have utilized their services. This provides the float that Aflac needs to be profitable.
The most recent quarterly report showed the AFL’s revenue actually dropped from the same quarter in 2021, from $5.2 billion to $4.8 billion. Indeed a look at the past ten years have seen annual revenue rates drop from $22.148 billion in 2012 to $17.647 billion in 2021. However, the company has been reporting increased sales coming out of the pandemic. Additionally, the pandemic appears to have limited the payout of benefits in 2021, according to the last annual report.
Despite lower revenues, the net income produced by Aflac has generally increased. In 2012, net income came in at $2.866 billion. Over the past ten years, only 2015 and 2016 had lower net income numbers. Last year, this number came in at $4.325 billion, so the income number has grown substantially while the revenue numbers have actually declined.
AFL’s EPS has grown over the past decade, as well. Indeed, the growth in EPS has exceeded the percentage growth in net income, going from $3.06 on a diluted basis to $6.39 between 2012 and 2021. It’s more than doubled in the past decade.
How does EPS grow faster than net income and revenue? That is where stock buybacks can come into play. Aflac has bought back around 260 million shares over the past ten years. Additionally, in its most recent quarterly report, the company announced an authorization to buy back another 100 million shares. This is in addition to another 25+ million shares were still allowed under a previous authorization. Combined, this makes up nearly one-fourth of the shares currently outstanding. With fewer shares, fewer owners are able to split the income a company produces, which drives up the earnings per share and likely the price, even without any additional net income.
I owned some Aflac over the past couple of years. I sold everything in my taxable account (at a slight loss) earlier this year on a summer bump when I learned I had a new job that required a move. I did not know whether I would need additional cash for a down payment on a house, and I did not want to sell near the bottom of a bear market. I initially purchased Aflac for its strong dividend growth. Additionally, I liked the fact that the yield, while not terribly high, was above that of the broader S&P 500 (SPY).
AFL has increased its dividend for 39 straight years, a record that few companies can match. The dividend increase for next year is only 5% ($0.40 to $0.42 per share per quarter), which is somewhat disappointing, but the past couple had been more impressive, coming in at 18% and 21%, respectively, for 2021 and 2022. Indeed, it was this high level of dividend growth after such a long dividend history that first piqued my interest.
At the current price of $70.33 (as of November 11), the yield is 2.18%, which is not massive. Additionally, the yield has dropped more than half a percent since just September as the price has increased. However, despite this dropping yield and the consistent (and sometimes high) dividend growth, Aflac pays out only 19.52% or 28.54% of its last 12 months of net income, depending upon whether you use a GAAP or non-GAAP basis. This indicates that the dividend should be quite safe for the near term, and it also provides room for additional dividend increases into the future.
I am currently looking to put the money that’s left after my down payment back into the market, and I looked at getting back into AFL. I hadn’t been researching the company since I sold, and I was taken a bit aback by the big run-up in the company’s price since the summer. It had been in the $50s when I sold, but it now exceeds $70 a share. I thought that this would make the company too expensive based upon what I paid for it in small increments over about a year and based upon what I sold it for. The company’s price increased quite a bit at a time when the overall market was crashing. However, upon looking at the numbers, the PE ratio of 13.36 on a forward-looking basis does not seem all that high comparatively speaking when looking at some other insurance companies like Progressive (PGR), which is currently north of 30.
The company has a higher PE and price than it did when I first bought, but with an increased share buyback anticipated to make positive impacts on EPS and a growing dividend, I might just go against my initial gut reaction to the higher price and purchase a few shares. I think AFL could continue to appreciate over the long run. While that appreciation will not be as good as it would be for those who bought in the $50s, it should still be substantial over a few years or decades.