Credit Suisse Ducking Any Further Investment In Aflac, Initiates At Underperform

Credit Suisse’s John Nadel initiated coverage of AFLAC Incorporated (NYSE: AFL) with an Underperform rating and a price target of $75, citing “recent share outperformance, likely ROE compression and pressure from low yields and higher hedging costs.”

Shares Too Elevated

“Aflac has a history of strong returns and has traditionally been a more defensive stock, with a strong capital position, lower exposure to fee-based earnings (and thus equity markets), and relatively less interest rate sensitivity,” analyst Nadel wrote. He added, however, that the company’s shares had significantly outperformed the broader group, with the gains being mostly currency driven.

Aflac’s shares have appreciated 20 percent year-to-date, versus a gain of only 6 percent in the S&P 500. Nadel believes that the shares are now pricing in too large an economic benefit from the recent strengthening of the Japanese yen.

The analyst forecasted contraction in ROE to ~15 percent over the next few years in view of sluggish earnings growth, resulting partly from low interest rates and tough economic conditions in Japan. “Further, growing disparity between U.S. and Japanese interest rates will cause an increase in hedging costs which, when included in Operating EPS, will likely cause 2017/18 consensus to reset 7-8% lower,” Nadel stated.

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