Is AIG Still a Good Value at $50?

Mega insurer American International Group (NYSE: AIG  ) is best known for its spectacular collapse in 2008 as the company used a government bailout to plug a financial products-induced wound. Despite receiving well over $100 billion in government assistance, AIG shares have performed remarkably well since the bailout as the insurer has shed units and repaid its government borrowings. As AIG stock flirts with $50 per share, it's time to take a look at whether or not this insurance giant remains a good value.

Source: AIG.

A look at tangible book
In many cases, we can use book value as one of many indicators for the value of a company. However, book value also includes things that can be easier to fluff up, so we're going to look at tangible book value -- which excludes things like goodwill.

In the following table, we can see a price to tangible book value comparison between AIG and two other major insurance companies.

Company P/TBV
American International Group 0.7
Prudential Financial (NYSE: PRU  ) 1.0
Metlife (NYSE: MET  ) 1.0

Source: Scottrade.com.

Looking at this table, AIG appears well undervalued compared to its peers. Based on AIG's current tangible book value, if the insurer were to rise to an equivalent P/TBV valuation as Prudential Financial and Metlife, AIG shares would rise to around $66 each -- an upside of around 30%.

Further considerations
But even tangible book value relies on accounting that values everything at its true value. In AIG's attempt to sell its plane leasing subsidiary International Lease Finance Corp (ILFC), it was revealed that the price AIG was planning to settle for would value ILFC at roughly two-thirds of book value and cause AIG to report a $4.4 billion loss on the sale. But ILFC represents one of AIG's last non-core assets, and its sale may have helped the insurer by allowing it to use the fresh capital to strengthen core businesses or buy back more shares.

For what its worth, the ILFC deal remains in limbo today now that a major Chinese backer has backed out of the deal. In response, AIG is reported to be considering a public offering of ILFC shares.

However, even after pricing in a book value reduction surrounding ILFC, AIG still remains below tangible book value and well below the multiples of its peers; this not even taking into account what overvalued assets may be sitting on the books of rivals.

Additionally, if the market begins to value these insurance companies at a premium to TBV, as would be quite possible with further investor confidence in the industry, then all of these insurers, including AIG, could see a higher share price.

Other developments
Today's AIG is working on rebuilding itself as more of a core focused business able to generate consistent profits and rebuild some of the shareholder value destroyed in the collapse. While AIG shares may never again see their pre-collapse levels because of the massive share dilution that took place during the bailout, AIG's latest initiatives are a step in the right direction.

In continuing with previous share buybacks, AIG recently launched another $1 billion buyback. But the big news was the reinstatement of the dividend. Granted, it's not much at only $0.10 per quarter, working out to a sub-1% yield.

The dividend, even at its tiny amount, begins to move AIG back into the same category as Prudential and Metlife. Even though the insurers' dividends are in the mid-2% range, AIG's dividend now gives the insurer similar access to dividend-only funds and investors who view dividends as a mark of stability.

Overall, this should be taken as a positive development considering AIG will still have room to raise its dividend in the future to make it more on par with those of peers.

Repairing the image
Even at $50 per share, AIG still trades at valuations lower than those of its peers. While tangible book value is not a perfect measurement of intrinsic value, even after factoring in certain writedowns, AIG compares favorably in this analysis. Given the buyback plans and dividend reinstatement, I continue to see AIG shares as undervalued and one of the best plays in the insurance industry today.

Investors looking to welcome (or welcome back) AIG to their portfolio should take a further look at whether this megainsurer fits with their overall investment strategy, from dividend, growth, and value perspectives. 

More dividend stocks
Dividend stocks can make you rich. It's as simple as that. While they don't garner the notoriety of high-flying growth stocks, they're also less likely to crash and burn. And over the long term, the compounding effect of the quarterly payouts, as well as their growth, adds up faster than most investors imagine. With this in mind, our analysts sat down to identify the absolute best of the best when it comes to rock-solid dividend stocks, drawing up a list in this free report of nine that fit the bill. To discover the identities of these companies before the rest of the market catches on, you can download this valuable free report by simply clicking here now.


Read/Post Comments (0) | Recommend This Article (0)

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.

Be the first one to comment on this article.

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: 2657581, ~/Articles/ArticleHandler.aspx, 10/1/2014 10:46:32 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