AIG is Finally Free!
Alexander is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Four years ago, American International Group (NYSE: AIG) was the poster child for financial failure and government bailouts. There were protests in the streets, legal cases filed, and even threats made against AIG employees. Fast forward four years and AIG is in private hands once again. With the disposal of the last of the Treasury's shares, AIG is no longer Uncle Sam's insurance company and investors fearful of the government shareholding are welcome to return.
Dawn is finally here
A few months ago, I wrote an article entitled Dawn is Coming at American International Group where I laid out how the remainder of the AIG stake would be disposed of. Today, this has happened and it is time to examine AIG without the government component attached.
AIG is continuing in its strategy of divesting non-core assets and it demonstrated that again with its sale of 80 percent of International Lease Finance Corp. AIG had been trying to sell this plane leasing subsidiary but received only low ball offers. Former owner of ILFC Steven Udvar-Hazy told Bloomberg he was interested in repurchasing ILFC from AIG in 2011. Udvar-Hazy now heads one of ILFC's biggest rivals, Air Lease (NYSE: AL). The comment on the repurchase was made shortly after the IPO of Air Lease, a lessor looking to grow its fleet about tenfold from when Udvar-Hazy made his offer.
With the $4.23 billion (with the possibility of increasing to $4.8 billion if the buyers exercise their option) AIG raises the possibility of additional share buybacks. During the sales of stock by the Treasury, AIG bought back around $8 billion in its own shares. With shares trading around half their book value, these repurchases are helping to even further boost book value. While book value will be slightly reduced following the ILFC sale, this could be made up for by additional buybacks now that another non-core asset has been disposed of.
In addition to buybacks, AIG is expecting to begin paying a dividend again in 2013. The exact amount has not yet been defined and could be anywhere between 2 to 3 percent (paid by insurers Prudential, Metlife, and Travelers), and the shiny penny Citigroup sends to its shareholders every quarter for a yield of a tenth of a percent. Keep in mind though, dividends exceeding $0.675 in a one year period would begin to adjust the exercise price on the Jan. 2021 AIG Warrants. Based on AIG's close on December 14, this would be a yield of just under 2 percent, an amount that could easily be reached in the future, especially if the share price rises.
While paying a dividend is a big step for AIG, the insurer is not likely to start out as a dividend king. The insurer will likely want to continue expanding operations and repurchasing shares. But the dividend will attract a group of investors who will only buy dividend paying stocks and this could provide a boost to the share price. Over time though, AIG is likely to increase its dividend as it finds more solid financial footing and this could mean an adjustment to the warrant exercise prices as well as being labeled as an income stock.
The AIG of today is far more focused than the pre bailout AIG and the insurer's recovery from begin a bailout poster child shows the efforts made by this company. With the government stake disposed of, AIG can now sell itself as being privately owned once again. The disposal of ILFC shows AIGs ability to execute its divestment plans and the future dividend offers the chance to attract new types of investors. With the worst now in the rearview mirror, look for AIG to continue in its efforts to show itself to be a competitive insurance company again. And for AIG shareholders to continue to see change at their company.
TulipSpeculator1 has no positions in the stocks mentioned above. The Motley Fool owns shares of American International Group and has the following options: long JAN 2014 $25.00 calls on American International Group. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!