A look back at Aflac
One year on, how have things panned out?
Almost a year ago I started my blog, and the first company that I reviewed was Aflac Incorporated, an American insurance company doing most of its business in Japan.
A year has now passed, and Aflac is still in my portfolio, and is currently my largest individual position.
As a general rule I like to review my existing positions at least once a year and see if anything has changed over the period, as well as whether or not my thesis has held up compared to reality.
The Thesis
The first thing we should do is look back to what I wrote down a year ago, and see exactly what I thought was likely to happen in the future, and list it out:
The effects of COVID will also be felt in AFLAC (…) in the very short term its business will suffer.
I don’t predict that this will be a long term problem for the company
On a longer term scenario it will be constrained by the Japanese economy and demographics, and is therefore unlikely to grow quickly there.
Whatever growth that comes will happen in its north American operations
It (Monetary Policy) will result in higher financial asset prices, of which AFLAC is a large owner of.
It (Monetary Policy) will result in a devaluation of the USD in favor of the Yen, which will result in its Japanese operations becoming more profitable in USD terms
(…) they plan on continuing their shareholder-value creating policies of Dividends and Share-Buybacks.
How has this held up?
Well, let’s take it point by point:
The effects of COVID will also be felt in AFLAC (…) in the very short term its business will suffer.
Well, I was wrong here.
Revenue has remained more or less flat, just like it was before covid, and claims and benefits paid out have actually decreased, resulting in increased pre-tax earnings!
Net earnings are down in 2020 as a result of a higher tax expense, but the pre-tax earnings are higher than in 2020 and 2019!
This is a pleasant surprise for me.
I don’t predict that this will be a long term problem for the company
With 2022 here, it looks like the window for covid to make any significant impact on Aflacs long term prospects is closing fast, if not shut already.
I’m inclined to pronounce this part of thesis as accurate.
On a longer term scenario it will be constrained by the Japanese economy and demographics, and is therefore unlikely to grow quickly there.
Only a year has passed, so it’s difficult to establish if this is accurate or not. That said, nothing material has changed that would impact this part of the thesis.
Whatever growth that comes will happen in its north American operations
Well, the company didn’t grow, nor did it’s North American operations.
So true-ish?
Ultimately I’m a bit disappointed with the North American revenue growth, but at the same time insurance is a slow industry, so I wouldn’t expect them to be growing super fast.
I’m going to say this was a miss.
It (Monetary Policy) will result in higher financial asset prices, of which AFLAC is a large owner of.
This kind of happened, though not to as great of an extent I expected.
Aflac does have some equity investments, and they did record very high gains during 2021, but most of its investments are Japanese government bonds that are held to maturity.
These bonds aren’t as volatile, and so did not significantly change in value during the year.
It (Monetary Policy) will result in a devaluation of the USD in favor of the Yen, which will result in its Japanese operations becoming more profitable in USD terms
I was absolutely wrong here, and the yen has actually weakened versus the dollar, putting a drag on performance!
(…) they plan on continuing their shareholder-value creating policies of Dividends and Share-Buybacks.
This I was 100% right, and very much so!
They have been buying back record amounts of stock, and paying out increasing amounts of dividends while doing it!
Overall, around 70% of their earnings are being returned to shareholders via dividends and share buybacks.
Given that my average purchase price is around $50, the dividends and sharebuybacks effectively give me a 9% shareholder yield!
The future
Overall, while I did make some mistakes, the core value proposition was the following:
Aflac is a stable mature company with consistent profits
Aflac will return to shareholders in a consistent manner
Aflac can be purchased are a low enough price to make such return attractive
None of these items have meaningfully changed, and the company is not likely to change them in the near future.
I will review the company again next year to see if anything meaningful has changed with the company. I do not expect any major changes.
I mean to remain a happy Aflac shareholder, and will add to my investment as my capital allocation restrictions allow.
My Stance: BUY
What about you? Do you own Aflac?
Let me know in the comments below!
Hey, thanks for this summary. Do you have some good resources how to analyze insurance and similar companies? I see revenue is falling here for many years, at the same time net income is rising nicely. What metrics, methods do you use to analyze it and if it is at fair value or lower/higher (again, would love to learn it myself..)