Upside for AIG Shares?
One of the top concerns for many investors is an increase in interest rates. However, those investors may wish to take a look at American International Group Inc (NYSE:AIG) stock, which is a stock that would benefit from rising interest rates. Let me explain.
Cash Flow Benefits of Rising Rates
The number one concern for AIG stock, being an insurance company, is interest rates, as the top and bottom line of the company has huge implications. For management, it is all about managing assets and liabilities on the balance sheet.
AIG takes in the premiums from its customers and then invests their cash into the bond market. The company uses their investment from the cash flow received to pay policyholders if a claim is made.
With interest rates sitting at all-time lows, they have no where to go but higher. For example, let’s say bond #1’s current rate is five percent and it’s face value is $1,000, which means you receive $50.00 for holding this bond after a year. Meanwhile, bond #2 had a rate increase and the rate is now eight percent and its face value is $1,000, which means you receive $80.00 for holding it for a year.
Aassuming all else remains the same, holding bond #2 for the next five years is much more beneficial to shareholders and the company’s balance sheet than bond #1. The company would have stronger cash flow as well.
Dividend
Comparing AIG stock’s dividend today to what it was in 2013, the growth of the payout is 320%, with the payment per share being $0.32 on a quarterly basis. The current yield is 2.10%, with AIG stock trading at $60.82.
During AIG’s investor presentation, in August, there were a lot of positives for AIG stockholders. In the remainder of 2016 and 2017, the goal is to return $25.0 billion back to shareholders via share buybacks, warrant repurchases, and dividends. (Source: “Investor Presentation,” American International Group Inc, August 30, 2016.)
Smart Money
AIG stock is actually one of the larger positions in the portfolio of Carl Icahn. The reason he holds AIG stock is because he thinks the company is cheap. There is no need to debate this with him, because the numbers don’t lie; the price-to-book value of AIG stock 0.72x. (Source: “American International Group Inc,” Morningstar, last accessed October 13, 2016.)
The price-to-book ratio is taking the current market value of the company and comparing it to the book value (or also known as historic value). In this case, the number is under one, which means the company is currently selling at a discount.
Final Thoughts on AIG Stock
The company is positioned in the right environment. Looking towards the future, the rates on AIG stock should be increasing over time due currently sitting at all-time lows. Having an investor such as Carl Icahn backing it is not a bad thing for AIG stock as well.