Has AIG Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if AIG (NYSE: AIG  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at AIG.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-year annual revenue growth > 15% (11%) Fail
1-year revenue growth > 12% (15.3%) Fail
Margins Gross margin > 35% 16.6% Fail
Net margin > 15% 30.2% Pass
Balance sheet Debt to equity < 50% 74.2% Fail
Current ratio > 1.3 0.94 Fail
Opportunities Return on equity > 15% 21.3% Pass
Valuation Normalized P/E < 20 19.14 Pass
Dividends Current yield > 2% 0% Fail
5-year dividend growth > 10% 0% Fail
Total score 3 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at AIG last year, the company has tripled its score. With huge divestitures, the company has made a lot of progress toward boosting return on equity and achieving a more sustainable valuation, even as its shares were able to eke out a small gain over the past year.

AIG hasn't lost its stigma as one of the tragedies of the financial crisis. Yet the company has done a reasonable job of getting money back to taxpayers, with the government's $182 billion commitment to AIG now paid down to just $45 billion. Even though the government still owns around 70% of AIG, it's working to sell off shares in an orderly fashion to try to prevent a share-price collapse that could come from selling too much at once.

But AIG now looks like a completely different company. Having restructured its operations through sales of divisions and winding down much of its financial-products business, AIG now has two main businesses: its Chartis property/casualty segment that competes against Travelers (NYSE: TRV  ) and Chubb (NYSE: CB  ) , and its SunAmerica life insurance unit that has gone up against MetLife (NYSE: MET  ) , Hartford Financial (NYSE: HIG  ) , and a host of other life insurance companies.

As fellow Fool Tom Jacobs pointed out a few months ago, AIG looks inexpensive compared to its P&C insurer peers Chubb and Travelers on a price-to-book-value basis. But life insurance has pulled down valuations on MetLife and Hartford as well, and the entire industry is struggling from low interest rates and tough financial-market conditions.

For AIG to keep improving, it needs to get itself out from under the government's ownership. Once that's done, the company can focus solely on what it's already been doing reasonably well: continuing to make back money from the debacle of 2008 that could well have led to its failure.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

AIG isn't the perfect stock, but we've got some ideas you may like better. Let me invite you to learn about three smart long-term stock plays in the Fool's latest special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.

Click here to add AIG to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. 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 Fool has a disclosure policy.


Read/Post Comments (1) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 01, 2012, at 8:49 AM, fraenkelfred wrote:

    your smart guys, how can you not understand that by the time there are all passes on your list it's WAY TOO LATE valuation wise for a value or turnaround stock. you'll make this the perfect stock 2015 at a price of $75

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1899393, ~/Articles/ArticleHandler.aspx, 9/17/2014 5:48:50 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement