Dawn is Coming at American International Group
Alexander is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
There are few companies that are mentioned in the same sentence with the words "bailout", "excess", and "irresponsibility" as often as American International Group (NYSE: AIG). After increasing its stake in the company to 92%, the U.S. government has been gradually reducing its holdings, which fell below the 50% mark in a recent share sale.
But this time, the government's share offering is significantly larger. At $18 billion, this post-bailout offer is topped only by Bank of America's $19 billion share sale soon after the bailouts. By selling so many shares in this one sale, the federal stake has fallen to less than 20 percent of AIG's shares, which would appear to be much welcomed news for AIG's shareholders.
Now that it's no longer majority-owned by the federal government, AIG will become more tightly regulated because of its holding of a small savings and loan. According to the Chicago Tribune, even if AIG were to sell the S & L, the company would be considered a significant enough player in the financial system to require additional regulations anyway.
Of course, what is depressing the share price right now is the flood of new shares entering the market. At $32.50 each, the new shares were priced below what the market traded shares for on Monday. In the past, the government has been gradually reducing its stake so the market would not cause the share price to collapse. But the new approach signals a clearer intention that the U.S. wants to rid itself of its AIG shares. Some have criticized the size of the sale, but Uncle Sam has pressed ahead, and it remains to be seen whether this many shares can be absorbed by investors.
For AIG, the share sale puts up a set of immediate hurdles, but they are hurdles the company would eventually have to face in the future. In both cases, it is widely acknowledged that the government wants to rid itself of the AIG stake in a way that is timely while not destabilizing the company or its stock price.
The company would have to comply with the additional regulations as soon as the federal stake fell below 50% meaning unless the stock sale had been tiny compared to the previous sales, AIG would need to begin compliance with these rules anyway. For this reason these regulations should not be an unforeseen curveball, rather they should have been expected to coincide with the next share offering.
In the case of the influx of shares, it appears the situation is under control. On the first day of trading the market seemed to be able to swallow them without causing a collapse in price. In addition, AIG is aggressively buying back its common stock and was going to purchase about $5 billion of this offering before reducing the buyback to closer to $3 billion. The share price remained stable on Tuesday and shares actually closed higher signaling the market was not immediately saturated with AIG shares.
Now, with the government's stake in the massive insurer down to about 20%, it allows more flexibility in how to unload the remaining shares. The government may decide to resume a slow sell down in an attempt to extract maximum profit from their investment. But if over the next few months this sale appears successful (as the market is indicating at the moment), the next move may be to sell all of the remaining shares in a single final government offering.
This leaves AIG room to run if the final sale is carried out sometime in the next year. The company trades at about half of its tangible book value, offering a value play for investors willing to assume some risk. In AIG's case, some still avoid the company due to the government stake but the disposal of this stake would remove this overhang a thus resolving some investor risks.
At this time, AIG seems more focused on repurchasing stock which makes sense due to the large discount to book. But freedom from government control may allow AIG to justify paying a dividend, an intention the CEO has already alluded to in a recent interview. Competitor Metlife (NYSE: MET) pays a modest dividend of 2.1% despite trading at a discount to book as well. But Metlife remained healthier during the 2008 crisis, and its investors expect their dividends to continue and while the share price has yet to recover to 2008 highs, it is much closer than AIG's. By contrast, when AIG was being bailed out, there was no way the company could justify paying its common shareholders a dividend. And these shareholders, for the most part, have not expected a dividend since the collapse.
A win for investors and taxpayers
Less than a month ago I wrote another article titled AIG: An Investment for All Seasons, where my final line was about everyone being an investor in AIG whether or not they chose to be one. But I am now happy to say that as taxpayers, we are now forced to own less of AIG than we have since before the bailout deal. As a bonus, profit estimates for the AIG rescue now range in the billions of dollars. If government and AIG can land this plane successfully, it will be a win for everyone: AIG investor by choice, or just an ordinary taxpayer.
Alexander MacLennan does not own shares in any of the companies mentioned in this entry.