Is AIG a 5 year investment rather than a 1 year investment?
It trades at less than book even though the business is highly profitable. It reinstated the dividend and didn't see an increase in the stock price for it. Between the buyback program and the increasingly strong balance sheet, the price will increase. But will it's soured reputation hold it back until the economy is recovered 5 or so years from now? The price should be much higher. For example, just look at the P/E Ratio: AIG=25.65 but competitor Metlife=93.51. All the major insurers have P/E ratios around 100 except AIG. I realize that AIG's dividend yields about is .8% while Metlife's yields about 2.3% but still... I find this stock frustrating to own.
Couple of things: firstly, based upon the past 4 quarters earnings, the stock trades at 18x ttm earnings. If you back out the $3 billion dollar earnings hit we took on Hurricane Sandy, we would trading at 13.3x ttm earnings (based on adding $1 per share eps). Based on analysts estimates we are trading at 10.5x 2013 fiscal earnings. I personally wouldn't be shocked if AIG was earning $6 per share by the end of fiscal 2014 but thats just me.
Secondly, in terms of time horizons, you have to understand that this is a speculators market right now. Tesla is trading at 100x forward earnings, LinkedIn, Twitter IPO mania etc....its 1999 all over again on a slightly lower scale (35x S&P500 earnings in 99 vs 20x in 2013). If you look back then, many "old economy" businesses did very poorly and were stuck in the duldrums dor the entire bullrun....then that balloon popped on the high fliers and money poured into value stocks. Well this market reminds me alot of that one...
also consider the lower interest rate enviroment...If AIG has $100 billion in bonds at 2.75% they are generating $2 billion less per year than if interest rates were at a more normalized 4.75%....this is huge....regardless though, I am not worried....We will look back on this stock sometime in the near future and say "AIG traded at 75% of book value! I should have bought much more." Unfortunately, buy that point the stock will be trading at 140% of book value or something similar. For those of you who believe that cannot happen, consider the fact that the stock traded at least 200% and at the most 500% of book value.