What: Shares of American International Group (NYSE:AIG), an insurance giant responsible for providing property and casualty as well as life insurance products, dove 13% in January, based on data from S&P Capital IQ, after receiving a notable downgrade and following a debt offering.
So what: With AIG's earnings set for later this month the big catalyst to the downside was a downgrade from Credit Suisse to neutral from outperform. Credit Suisse also knocked $1 off its target price to $59 on shares of AIG. The covering analyst, Thomas Gallagher, noted that he and his firm believe AIG is the best-positioned non-bank that's considered to be a systematically important financial institution. As the note to investors points out, AIG is probably close to a maximum sustainable payout ratio and it believes MetLife or Prudential offer better earnings visibility through 2016.
Also, AIG announced an $800 million 40-year bond offering. Even though the yield of 4.375% that AIG is paying on its bonds is a vast improvement over what it could have received even a few years ago, it's nonetheless an increase to AIG's already substantial debt load.
Now what: While rare, this is one of those instances where I completely agree with the covering analyst. AIG has certainly done a good job of reining in costs and insuring that it focuses on attracting high-quality clients. A year of lower than expected catastrophes was another bonus for AIG's property and casualty unit.
However, the lack of a clear time frame as to when the Federal Reserve might raise its federal funds target rate makes it difficult to predict when AIG's investment income could rise and this stock could take its next step forward. As it stands now AIG is pretty much in neutral after an impressive run since 2009 with little to no top- and bottom-line growth.
If you're planning to hold AIG for next five to 10 years then I don't think near-term sluggish growth prospects should deter you from investing. If, however, your investment horizon is only a year or two you could wind up disappointed, even with a forward P/E of just 10.
Sean Williams owns shares of Bank of America, but has no material interest in any other companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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