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3 Reasons Aflac’s Stock Could Fall

US Dollar to Japanese Yen Exchange Rate Chart

Over the decades Aflac has earned a laundry list of superlatives: One of the world's most ethical companies, best companies to work for, most admired companies, and dividend aristocrat -- but no company is bullet proof.

US Dollar to Japanese Yen Exchange Rate Chart

Aflac's second quarter filings suggested that because the majority of business operations are conducted in Japan, their "functional currency is the Japanese yen, [and] fluctuations in the yen/dollar exchange rate can have a significant effect on our reported results."

The key word is "reported." Aflac doesn't revert yen into dollars every quarter, and changes in currency have no impact on the strength of the underlying company.

However, quarter-to-quarter earnings growth is extremely important to many investors, and further declines in the yen versus the dollar could cause declines in Aflac's stock price.

2. Aging/shrinking Japanese population

Japan made headlines in 2013 when the country's population dropped by almost 250,000. According to BBC Asia , if the trend were to continue Japan would lose a third of its population over the next 50 years. Also, at roughly 30%, Japan has one of the highest percentage of individuals 65 and older in the world -- and that number is growing.

In the short-term, the aging population could benefit Aflac as people look for greater coverage beyond the state-run health care system -- but as the population and number of retirees grows the workforce shrinks, which could potentially strain Japan's economy while reducing Aflac's pool of potential customers.

3. Deregulation in Japan

In 1974, Aflac became the third U.S company licensed to sell insurance in Japan. This gave Aflac a huge leg up to establish its brand in a less competitive market for supplemental insurance.

However, as part of the plan to improve economic growth Japan's government has been deregulating, and allowing more foreign companies to compete. Today, massive global insurers like ING , Prudential Group , and Metlife are all competing for market share in Aflac's key market, "critical illness insurance."

While Aflac still holds a dominant market share in the region, mix a shrinking population with greater competition and sales growth could get more difficult looking forward.

Last word

No business is free of risk, and Aflac certainly has its fair share.

That said, I still believe that the long-term value fluctuations of the yen will have little impact on Aflac's core business. And whether it's through an increased birth rate or loosening restrictions on immigration, Japan will find a way to grow its population over time, and the company's brand name recognition and alliance with conglomerate Japan post will help Aflac ward off competitors.

For these reasons, I find Aflac a great business and a strong buy for any portfolio.

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The article 3 Reasons Aflac's Stock Could Fall originally appeared on Fool.com.

Dave Koppenheffer has no position in any stocks mentioned. The Motley Fool recommends Aflac. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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