American International Group (AIG) has been recovering since it was forced to seek bailout money from the Troubled Asset Relief Program (TARP) in 2008, after its poor moves in the subprime business. At the time, AIG required approximately $130 billion to continue in business, which included $85 billion by way of a special credit facility.
The Inspector General has said that some of the money owed to the government may never be repaid. It must hope that this is not the case with AIG, in which the taxpayer is still out by around $50 billion. Having bailed out AIG in the form of loans, the government converted the unpaid portion to common stock in late May 2011. To break even, and repay the taxpayer the money it used to bail out AIG, the government would need to sell its remaining stake in AIG at $28.73 per share. Treasury spokesman Matt Anderson said, "We'll continue to balance the important goals of exiting our investments as soon as practicable and maximizing value for taxpayers."
Meanwhile, AIG has continued with its business strategy of restructuring, refocusing, and seeking efficiencies to enhance shareholder value. To this end, the measures that it has taken recently include:
- Restructuring the geographic lines of its subsidiary Chartis. This should allow greater concentration on autonomous country headquarters where growth economies offer greater profitability (announced 01-17).
- The merger of the group employee benefits units of Chartis and American General, announced January 24. Related cost savings and business synergy will prove positive in the short term and beyond.
- In October last year, it added credit facilities of $4.5 billion. This will help its businesses to be flexible in the future, whilst also indicates an improving view of the company by others in the financial field.
- In November, it announced that it may repurchase up to $1 billion of its shares as market conditions allow.
AIG has reported cash of $55 billion, though its debts are $78 billion. Shares are trading at around $25 and on a trailing price to earnings ratio of 5.73. Whilst the future for AIG looks brighter now than at any time since the bailout, investors should be wary about buying shares in the company.
Although improvements in its business matrix are being seen, these may be held back should the economy falter. The real issue for me, though, is the government stake. It held similar stakes in Bank of America, Citigroup, and Chrysler, and sold all of those when it could. There is no doubt in my mind that in the current climate, with government borrowing out of control and the economy not growing as strongly as had been estimated (Friday's release of annualized 4th quarter GDP growth of 2.8% was some way below expectations of 3.2%), the government would be a happy and willing seller at a price that would see its investment recouped.
In the first half of last year, shares drifted down until the issue of shares to the government was completed in late May. Since then the shares have traded in a range of $19 to $29, and under performed the S&P 500 Index by a margin.
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Analysts' mean 12-month price target for AIG shares is 27.42. Whilst share repurchases and a better business strategy is positive for the shares, the government stake overhangs the market and puts a roof on share price advance. Consequently, I expect continued under performance of the wider market for some time to come.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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