American International Group Inc: 3 Reasons to Be Bullish on AIG Stock
December 28, 2016
Is Now the Time to Consider AIG Stock?
Over the past year, shares of American International Group Inc (NYSE:AIG) stock have been stuck in a trading range.
In order for AIG to grind higher and move outside this trading range, there must be positive catalysts to move the stock higher. Let me explain three reasons why I am bullish on AIG stock and see the possibility of a higher trading price.
Valuation
When it comes to the financial industry, a useful measure is to compare the current trading price to the book value of the shares. The current trading price for AIG stock is $66.61, compared to a book value of $85.02. In simple terms, this means the historical value of the company’s assets are worth $85.02. Therefore, based on the current trading price and the company’s historic value, the shares are currently undervalued.
Another metric that provides evidence that AIG stock is undervalued is the forward price-to-earnings (P/E) ratio. This ratio gives investors information about how the current trading price is compared to the expected earnings for the next year. For AIG stock, the estimated 2017 forward P/E ratio is 12.30 times. (Source: “American International Group, Inc. Analyst PE Estimates,” NASDAQ, last accessed December 22, 2016.)
On a comparative basis, the forward price-to-earnings ratio is trading at a discount when compared to the S&P 500, which has a ratio of 19.06 times. Based on this ratio, the shares are trading at a 35% discount to the overall index.
Growth Drivers
In order for the shares to increase and be in line with the valuation, there must be future growth. For American International, one of the most important numbers that the company keeps an eye on is interest rates. Currently, interest rates are sitting at historic lows, with two rate hikes in the past year. These are positive catalysts for AIG stock going forward.
The reason for this is that more revenue hits the bottom line of the balance sheet as interest rates increase. The way that American International’s business model works is that it provides customers with an insurance policy and puts the money received into an interest-bearing investment.
When a claim is made by a policyholder, the interest that is received by American International is used to pay for it. And with higher interest rates comes higher interest payments, which provide a cushion for money earned and payments for a claim. The principal of the investment stays untouched, and with lower interest earned, there is a possibility of using the principal amount of the investment, which has a negative effect.
Returning Money to Shareholders
Regardless, the company has continued to reward shareholders in a low-interest environment. The current dividend of $0.32 is paid to shareholders on a quarterly basis. Further, the dividend has seen an increase of 156% since 2014. At present, the shares are trading at $66.61, with a current yield of 1.92%.
The board of directors also approved a $3.0-billion share repurchase program, announced as part of the third-quarter earnings. This is a tax-efficient method of returning money to shareholders. (Source: “AIG Reports Third Quarter 2016 Results,” American International Group Inc, November 2, 2016.)
Final Thoughts on AIG Stock
AIG stock could possibly see more dividend hikes and share repurchases in the future. This is because a gradual increase in interest rates will affect the top and bottom lines of the financial statements. With this key driver, the valuation could be more in line with the index.
AIG stock is a dividend growth stock that income investors should give consideration, as it could potentially reward shareholders over the long term.
