Elevated Risks And Shifting Focus Threaten Core Product Viability And Profit Margins

Key Takeaways

• Focusing intensely on the U.S. market and new product investments may increase costs, potentially impacting profit margins and operational efficiency.
  
• Aflac's management of liquidity and capital, emphasizing share repurchases and dividend growth, could restrict financial flexibility for future investments or absorbing shocks.
  
• Aflac's new products and strategic focus on core markets, alongside disciplined capital management, are poised to enhance revenues, operational efficiency, and shareholder value.

Catalysts

Through its subsidiaries, provides supplemental health and life insurance products.

• Elevated sales of the new first sector product TSUMITAS in Japan, while initially boosting revenues, may not sustain its high initial growth rate and could potentially overshadow or cannibalize the company's core third sector product sales, impacting long-term revenue growth.
  
• An intensive focus on the U.S. market to drive profitable growth through stronger underwriting discipline and increased benefits in certain policies could constrain near-term profit margins due to higher claims costs.
  
• The significant investment in new distribution strategies and product lines, particularly in group life, absence management, disability, and individual voluntary benefits in the U.S., poses a risk to operational efficiency, potentially increasing the expense ratio over the medium term.
  
• The company's initiative to optimize its dental and vision platform in the U.S. requires substantial upfront investment and time to achieve scale, potentially impacting short to medium term earnings before contributing positively to net income.
  
• Aflac's strategic emphasis on managing liquidity and capital, including share repurchases and maintaining dividend growth, while fundamentally strong, may limit the company's financial flexibility to invest in accelerated growth opportunities or absorb unexpected shocks, which could influence the future earnings potential adversely.

Assumptions

• Analysts are assuming Aflac's revenue will decrease by -2.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 28.3% today to 20.8% in 3 years time.
• Analysts expect earnings to reach $3.7 billion (and earnings per share of $7.34) by about August 2027, down from $5.5 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.1x on those 2027 earnings, up from 9.9x today. This future PE is greater than the current PE for the US Insurance industry at 13.4x.
• Analysts expect the number of shares outstanding to decline by 5.73% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.01%, as per the Simply Wall St company report.

Risks

• Aflac's strategy of introducing new products and distribution strategies in both the United States and Japan is leading to profitable growth, which could strengthen revenues and earnings.
  
• The launch of the Tsumitasu product in Japan, which saw a sales increase of 4.5% in Q2, alongside efforts to sell core third sector products to younger customers, could expand the customer base and positively impact premiums and revenue growth.
  
• Aflac's disciplined approach to expense management and the increase in benefits for certain policies to improve value for policyholders are likely to enhance persistency rates and profit margins.
  
• The company's ongoing commitment to prudent liquidity and capital management supports a strong dividend track record and share repurchase, potentially contributing to shareholder value and impacting net margins positively.
  
• Aflac's strategic focus on optimizing its dental and vision platform in the U.S. and the balanced approach towards profitable growth may lead to an improvement in pretax profit margins and operational efficiency.

Valuation

• The analysts have a consensus price target of $92.83 for Aflac based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $114.0, and the most bearish reporting a price target of just $81.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $17.7 billion, earnings will come to $3.7 billion, and it would be trading on a PE ratio of 14.1x, assuming you use a discount rate of 6.0%.
  
• Given the current share price of $97.17, the analyst's price target of $92.83 is 4.7% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.