On Sunday we learned the government is dumping even more of its stake in bailed-out insurance giant American International Group (). According to reports, the U.S. Treasury will sell $18 billion worth of its AIG stock to get the company out from under the onus of majority ownership by the government.
This sale could result in taxpayers winning a small profit on their “investment” in AIG — the biggest bailout of the bunch. With $182 billion in total federal aid committed aid to the company, it dwarfs the $85 supplied to both Chrysler and General Motors (NYSE:GM) to avoid bankruptcy or the TARP funds dished out to banks like Bank of America (NYSE:BAC) and Citigroup (NYSE:C).
Of course, all these facts are a clear signal that this AIG sale is driven almost wholly by politics because it may deliver a profit to taxpayers on their “investment.” President Obama is clearly looking for good headlines before Election Day.
But I’ll leave the bailout analysis to the pundits. For investors with an IRA or a brokerage account, the big question here isn’t about free market philosophies but about whether AIG stock is a buy.
Let’s take a look at the pros and cons:
AIG has been profitable for three quarters running. Top-line growth isn’t all that grand, but thanks to a number of high-profile asset sales — from a $15.5 billion deal to sell its Alico health insurance operations to MetLife (NYSE:MET) to selling its Japan life insurance businesses AIG Star and AIG Edison to Prudential Financial (NYSE:PRU) for $4.2 billion — it’s hard to get a fair assessment on the revenue front.
And though divestitures have been necessary to pay back the government, the sales have also allowed management to refocus. The business has abandoned global derivatives and other kinky investment schemes. Now, AIG is driven by three simple divisions: a global property insurer via its Chartis businesses, a U.S. life insurance and annuity company SunAmerica and the market-leading mortgage insurer United Guaranty.
Shares are up over 40% year-to-date, so investors seem to like what they see. Experts like Jim Cramer have been touting AIG for a while. Take this post from May after a roughly $5 billion secondary offering of AIG stock by the Treasury, including the quote:
“With AIG, you’re getting your hands on the greatest and most improbable turnaround story I’ve ever seen. Under the phenomenal leadership of CEO Robert Benmosche, AIG has gone from an overleveraged, highly complicated financial company into a leaner, slimmed down play on life insurance, property and casualty insurance and mortgage guarantee insurance.”
Dilution is a risk with a secondary offering this large, but according to analyst reports, management at AIG wants to suck a large amount of that stock up itself — buying $5 billion of the $18 billion sale. That will help prevent a glut of new shares driving down prices.
This is Treasury’s fifth sale of AIG stock in a little more than a year, and the latest offering at the beginning of August went quite well. AIG stock price not only held firm after the 164 million share offering but actually climbed. The market seems to be receptive to previous moves, so that bodes well for the next installment.