Follow The Buffett Rule on AIG
Bill is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
American International Group (NYSE: AIG) recently announced the acquisition of Woodbury Financial Services, an independent broker-dealer, by AIG’s life and retirement business, SunAmerica Financial Group. Doesn’t this "too big to fail" owe the federal government a truckload of cash? Wasn’t AIG selling off everything but the commodes in the executive washrooms just a few months ago? Now they are buying entire companies?
Recently, the Treasury netted $5.75 billion from a partial sale of its AIG common stock holdings. The Department of the Treasury still owns more than 871 million shares of common stock, having sold some 47% of its original holdings. Treasury’s remaining $25 billion equity stake in AIG represents only 14 percent of the original federal commitment. All the rest has been repaid, including AIG’s debt to the Federal Reserve. The government has made around $13 billion on the deal.
As a hard-working taxpayer, I resent being taken advantage of. Who can forget the lavish executive getaway even before the ink was dry on the $182 billion commitment AIG received from the government? In fairness, AIG only used about $140 billion. But investors must ignore emotions and focus on facts.
Let’s look at AIG from a value investor’s perspective. It has a market cap just north of $58 billion and it's trading at around $33 per share. It is beyond cheap, have a trailing twelve month price to earnings ratio of 3.10 and a promising price to earnings growth ratio of 0.35. Throw in the price to book of 0.56 and you begin to understand why Bruce Berkowitz, head of the Fairholme Fund, is about 38% AIG. It’s hard to make a case for passing up a stock selling at a 44% discount to book value. Return on equity is a beefy 21.29%. Quarterly year-over-year revenue and earnings growth are an impressive 5.8% and 147.3%, respectively. AIG’s debt to equity and current ratios stand at 74.18 and 0.94, respectively. Not ideal, but far from terrible. Taken as a whole, the fundamentals look pretty darn good ... maybe even Buffett worthy.
Beyond its recent acquisition of Woodbury and beyond the successful Treasury sale, other positive catalysts deserve a mention. AIG met expectations on revenues and eclipsed expectations on earnings per share. Another positive catalyst arrived in the form of a nod from Moody’s on the stability of AIG, asserting the company’s financial strength and senior debt ratings. Another positive catalyst comes in the form of AIG’s wholly owned subsidiary, International Lease Finance Corp., news that it signed a letter of intent with Air Asia to lease six Airbus airliners.
For those not intimately familiar with American International Group, it is helpful to know it operates in four segments: Chartis, which handles the property and casualty book; SunAmerica, which handles life insurance and AIG’s retirement services; International Lease Finance Corp., which I mentioned earlier; and finally AIG’s "other operations," which is basically everything else and includes assets it is trying to sell or run-off. One of those is AIG Federal Savings Bank, and what happens with it will have a significant impact on AIG’s future.
Here’s why! AIG’s ownership of this $1 billion bank will subject the entire company to oversight under the Volcker rule and it will be regulated by the Fed as a savings and loan holding company once the government's stake in AIG falls below 51%. This isn’t good for AIG and it follows that this oversight would not bode well for its shareholders.
I’m betting that AIG will sell or otherwise liquidate AIG Federal Savings Bank in the near term, even if it must do so at a loss. AIG’s CEO, Robert Benmosche, acknowledged that just such a move was under discussion. AIG’s International Lease Finance Corp. has not been a stellar performer and many argue that it should be sold or at least spun-off as it was rumored to be almost a year ago. As for Chartis and SunAmerica, AIG has plans to rebrand both under the American International Group name.
To paraphrase Warren Buffett, you should invest in businesses you understand. The post-crisis AIG is significantly easier to understand, but remains a complex and somewhat convoluted enterprise. As it embraces core competencies, which is the direction it seems to be taking, it will become less difficult to embrace AIG as an investment option. While I believe the outlook for AIG is positive overall, for now, you may want to stick with something more conventional such as Travelers (NYSE: TRV), which doesn’t stray far from its core business.
Travelers has a fantastic price to earnings (9.98) and a great price to earnings growth ratio (0.96) but has struggled recently with revenue and earnings. It still has fans and is being recommended as a buy quite recently. I can’t say that I disagree. Another solid option might be Ace Limited (NYSE: ACE), which has a very good price to earnings ratio (12.18) and a decent price to earnings growth ratio (1.38). Like Travelers, ACE quarterly year-over-year revenue and earnings growth took a hit, but ACE is stronger than Travelers financially and is generally more favorably regarded by analysts.
In conclusion, I believe that if you can wrap your head around AIG it is a promising long-term play. If not, you should probably stay on the sidelines until AIG pares down to its core competencies. In any case, it would serve you well to follow Buffett’s advice and stick with what you know and understand.
BillEdson11 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend American International Group. 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. If you have questions about this post or the Fool’s blog network, click here for information.