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.

Looking to cook up a market-stomping stock portfolio? Check out our FREE report "7 Ingredients to Market Beating Stocks" and get started right now!

Related Articles
  1. Investing

    Build a Retirement Portfolio for a Different World

    When it comes to retirement rules of thumb, the financial industry is experiencing new guidelines and the new rules for navigating retirement.
  2. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  3. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  4. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  5. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  7. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  8. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  9. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  10. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  5. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  6. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!