Aflac is one of the highest-rated stocks on my watch list. It scores high on almost every metric that I care about, and yet I still have trouble pulling the trigger on more shares. It has a nice low p/e, a very safe payout ratio, very nice earnings growth, and reasonable dividend growth. I am comfortable with the business model and confident in the management, and there is certainly room in my portfolio for more financial / insurance stocks.
I think my two big problems with it are not so rational, but still they hold me back. The first is that the shares I do own I got at an average price of $44.68. So it is just psychologically hard to buy it in the mid-$50s with a yield around 2.5 percent. My second problem is the yield. Buying shares right now gets you an initial yield of right about 2.5 percent. That isn't too shabby really, but it also just isn't exciting at all. I prefer starting yields of 3 percent or above, and the shares of AFL that I do own I have an initial yield of 2.96 percent and a yield on cost of 3.14 percent. Those numbers make today's 2.5 percent all the less appealing. Buying new shares today will blow my averages with AFL!
All that said, I realize that these are not rational reasons to avoid buying at today's prices. Especially since, as I mentioned at the start, it is the second-highest rated stock on my list.
What do you guys think?
You're absolutely right, of course. I concede that it is a silly psychological anchoring problem.
I do wish that AFL would up the payout ratio just a bit so as to increase the yield, though. I understand that they needed the cash during the crisis to manage / fix their portfolio, but I would hope that things are more stable and sustainable now and more of earnings could be allocated to dividends. I don't mean that they should up the payout ratio to 50 or 60 percent, but even moving to a (still quite safe) 30 or 35 percent payout ratio (assuming earnings stay healthy) would mean a very solid dividend increase from current levels.
I'm still skeptical of all of the financial and insurance stocks. If I can't figure out what they do, I got no business investing in them.
I would like to revisit this discussion of Aflac.
I've been reading up on it and just as Kerim mentioned in the original post above, it looks like a great company in many ways. Moreover, even though you could have had it for less per share not so long ago, at today's prices it still seems like a value -- perhaps even still very undervalued.
But I am a dividend growth investor, not a straight value / growth investor. And it looks to me like Aflac is pretty darned stingy with the dividends and the dividend growth. A purchase today gets you an underwhelming initial yield of 2.3 or 2.4 percent or so. Even if they continue to grow the dividend at 8 or 9 percent, which they've been doing for the last few years since the 2008-2009 turmoil, the payout from AFL is going to be on the light side for the foreseeable future. With strong earnings and a very low payout ratio (around 20 percent), they could certainly be a bit more generous with the dividend.
So the question I'd love to hear opinions on is what good is an excellent stock like AFL to a dividend growth investor if they are weak on the dividend payout and dividend growth part of the equation? Should I just be content that the strong company performance makes the dividend "safe"? Should I compromise and in this case hope for a good portion of my return to be in the form of share price appreciation? But share price appreciation does little for the income stream I am nurturing and growing -- that's why I am a DG investor and not a growth investor in the first place.
Sorry to rant. Would love to hear thoughts about AFL and the general questions I've raised.
Just doing a quick look at Fastgraphs, AFL has a 20 year DGR of 17.6% and an annual total return with dividends reinvested of 15.5%. It is projected to return 17.4% annually for the next 5 years.
$10,000 invested 20 years ago would have received $25,498 in dividends if they were reinvested and would be worth $168,340 in total.
The yield may not look very impressive at current rates, but this has been a great stock and is at an attractive valuation even after its run up.
The low yield keeps it off of some investors radar, especially hardcore dividend growth investors or those at or near retirement who need the income from investments for living expenses. For anyone with a longer term focus who is still in the accumulation phase (me), I think it is a great stock for a portfolio.
Aflac is my largest current holding mainly because I got in at an amazingly good low valuation. I think it still offers one of the best values available in the current market conditions.
I'm still failry young so I don't worry too much about current yield. I like current yield on companies I buy to be above 2% but that's about all I require. However, the decent growth rate needs to be there if yield is fairly low. I believe as (if) the economy stregthens Aflac will begin to grow their dividend at more substantial rates again. But that's pure speculation. Main reason I'm long on Aflac is the great value I got in at.
I might nibble on a little more AFL if this pullback continues. The last couple of years I've hoped for a more substantial dividend increase, but perhaps *this* really is the year. They are arguably much further "out of the woods" from the meltdown now and could afford to be a tad more generous without giving up much safety. Hope springs eternal!
AFL is a great company and I have a position in the stock. However, it is not a full position and the main reason for it is that AFL's earnings are too closely tied to the $ - ¥ exchange rate. I view that as a risk, as the current Japanese government is trying to drive down the ¥ to jumpstart their economy.
Hello Rudester! Welcome to the forum and thanks for posting!
My position in AFL is not too big either, but I really do wish that I had added more back in the mid $40s! Even at $60 it is one of my highest-rated stocks, and I do intend to add more when my funds allow. (Although I do have some competing interests right now, like PM, KO, and TGT). I agree that the currency rate is a potential risk, but not one that I know enough about to manage. I think management navigated the company through the crisis and its aftermath well, and as an owner of the company, that is what I am paying them for!
I do hope that Aflac is a little more generous with the upcoming Q4 dividend raise than they have been in recent years. I think their earnings more than allow it.