The Road Ahead For AIG (AIG)

By Max Radushny | March 23, 2007 AAA

With spring having arrived, the behemoth of full-line insurance and component of the Dow Jones Industrial Average, American International Group (NYSE: AIG), gave investors several reasons at once to brood over what this stock actually has in store.

A Look at the Numbers
At first glance, the prospects are all rosy. Firstly, the profits for the quarter rose to $3.44 billion or $1.31 per share, from last year's $444 million or $0.17 per share.

Excluding the multiple non-recurring items, the earnings constituted $1.50 per share, which just met the analysts' estimates. Secondly, American International Group bankrolled the annual 20 % increase in the dividends' distribution starting from the month of May.

Thirdly, AIG announced a buyback program that will allow repurchasing stocks for the amount of up to $8 billion. The Group is planning to buy back stocks to the value of up to $5 billion already this year.

In this connection, some of the analysts made statements about the great prospects for the growth of AIG stock and even claimed this data would cause the correction to end market-wide. With all due respect for their opinion, the future may not in fact be that bright for AIG.

Dividend Not Quite as Good as it Seems
Even despite the considerable increase in the dividends' distribution, the dividend yield of the AIG remains rather low. In particular, AIG's dividend yield is more than twice as low as that of S&P 500 and almost 2 times lower than the average dividend yield in industry.

That is why, despite the applied capital management approach, AIG is unlikely to be able to entice those investors who are after dividend proceeds and will be attracted by companies that boast greater profitability. However, those investors who are counting on an increase in the share price are already holding long positions and are thinking about when those should best be closed.

Other Factors -- A Drop in the Ocean
The information about the repurchase program may fail to make an impression, as the buy-back of a 180 billion dollar company's shares to the value of 8 billion bucks is a drop in the ocean. For comparison, very recently, Federated Department Stores (NYSE: FD) announced a repurchase program for the amount of USD 4 billion but failed to overcome its 52-week high after this announcement, although the market capitalization of FD constituted some $23 billion.

After the AIG information was made public, the stock jumped almost 4% from $67.41 and is fluctuating under $70. At the moment, the price of an AIG stock already builds in earnings that will be in-line, the planned growth of the distributed profits and the buy-back plan.

Also, the stock price reflects the analysis of the earnings estimates for the 1st quarter, whereby a $1.53 profit per share is expected. This is the second most profitable quarter in the last 5 years. It will yet take AIG quite a bit of effort to achieve this kind of a result. In addition, the situation becomes all the more complicated, due to the fact that in the last 5 years the 1st quarter has never been AIG's most profitable one.

Growth Issues
There is another interesting fact that is worth a mention. Only one, and not the most influential, rating agency Deutsche Securities slightly raised the price target from $69 to $73 after the publication of the quarter report and information on their profit distribution policy and repurchase program. No upgrades or serious rating changes.

That is why, in my opinion, the potential for any further growth of the AIG stocks is exhausted and it's only a favorable macroeconomic situation that is capable of restoring this potential. In particular, the financial sector is developing quite dynamically against the background of the economy's other sectors.

Besides, as far as the future of the stock market is concerned, for the time being investors' sentiment is predominantly optimistic. All this makes the growth of the AIG stock possible. However, this growth would be insignificant as the optimistic sentiment among investors turns to a pessimistic one, due to a potential slump in the growth of the corporate profits and economy on the whole.

The statements by the Federal Reserve about a continuation of "solid economic growth" sound more like attempts to prove the need for just another increase of the Fed Fund's Rate, than they do the truth. Non-farm payrolls remain very low, while the home-building industry is in a slump too.

Conclusion
Despite the good news from the American International Group, the company has quite a feat ahead of itselft to substantially beat estimates given several of the economic factors mentioned above. It may be more prudent to refrain from going long and rather look for the right moment for going short.

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