How Safe is Aflac's Dividend?

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In this video, we perform a deep dive on Aflac’s dividend safety.

Aflac is a diversified insurance corporation that provides accident, short-term disability, critical illness, dental, vision, and life insurance. Approximately 70% of the company’s premium income is derived from Japan, with the remaining 30% coming from the United States. Aflac was founded in 1955 and currently trades with a market capitalization of $35 billion.

Looking ahead, investors cannot rely on Aflac’s dividend history alone to measure its dividend safety. For the remainder of this video, we will discuss the company’s current dividend safety from four perspectives:

1. it’s dividend safety in the context of its current earnings
2. its dividend safety in the context of its current free cash flow
3. its dividend safety in the context of its recession performance
4. its dividend safety in the context of its current debt load

Aflac’s Dividend Safety Relative to Earnings

When Aflac reported its third quarter financial results on October 24th, the company announced that it generated adjusted earnings-per-share of $1.04 in the three-month reporting period. For context, Aflac paid a $0.26 quarterly dividend during the same time period for a payout ratio of 25%.

Looking out over a longer time horizon, our conclusion is the same. Aflac generated $3.08 of earnings-per-share through the first nine months of fiscal 2018 and paid $0.78 of common share dividends during the same time period for a payout ratio of 25%.

Aflac’s Dividend Safety Relative to Free Cash Flow

Many analysts believe that comparing a company’s dividend payments to its free cash flow is a better method for assessing dividend safety. Accordingly, we will now compare Aflac’s current dividend payment to its free cash flow.

Through the first nine months of fiscal 2018, Aflac generated $4.7 billion of free cash flow and distributed $595 million of common share dividends for a free cash flow dividend payout ratio of just 13%.

Using free cash flow, our conclusion is the same as when we used earnings to measure Aflac’s dividend safety. The company’s dividend appears safe for the foreseeable future, and its payout ratio using free cash flow is actually lower than the earnings-per-share equivalent.

Aflac’s Dividend Safety Relative to Recession Performance

Companies do not cut their dividends in the good times. Instead, dividends are reduced when companies experience financial difficulties. Accordingly, this section will analyze Aflac’s current dividend safety in the context of the company’s historical recession performance.

We believe that the best way to measure a company’s recession resiliency is by measuring its earnings-per-share performance during the financial crisis that occurred between 2007 and 2009. Aflac’s performance during this time period is shown here:

• 2007 adjusted earnings-per-share: $1.64
• 2008 adjusted earnings-per-share: $1.31
• 2009 adjusted earnings-per-share: $1.96
• 2010 adjusted earnings-per-share: $2.57
• 2011 adjusted earnings-per-share: $2.09
• 2012 adjusted earnings-per-share: $2.93

Although Aflac’s earnings did experience a minor downturn during the last recession, they rebounded to a new high in the subsequent fiscal year. They also continued to cover the company’s dividend, and it continued its multi-decade streak of dividend increases. With all this in mind, we have no concerns about the company’s ability to pay rising dividends during future economic downturns.

Aflac’s Dividend Safety Relative to Its Current Debt Load

The last angle that we will use to assess Aflac’s current dividend safety is by looking at the company’s current debt level. More specifically, we will see how much the company’s weighted average interest rate will need to increase before the company’s free cash flow will no longer cover its dividend payment.

Through the first nine months of fiscal 2018, Aflac generated $164 million of interest expense and had $5.3 billion of debt outstanding for a weighted average interest rate of 4.1%.

The following image shows how changes to Aflac’s weighted average interest rate would impact the company’s dividend safety as measured by free cash flow.

As the image shows, Aflac’s weighted average interest rate would need to rise to well above the 25% level before its dividend would no longer be covered by free cash flow. Accordingly, we believe that the company’s debt level is unlikely to impact the safety of its dividend moving forward.