The biggest risk as I see it is the funny accounting on behalf of the government. Consider that while AIG is profitable, a big reason for that profitability comes from huge tax breaks. AIG didn’t pay a dime in 2011 corporate taxes and in fact got money back from the IRS! And when you look at its landmark Q4 filing at the end of 2011 that pushed the company back to profitability, it involved a staggering $17.7 billion tax benefit from the government!
We can debate the virtue of allowing companies to write off the pain and get a pass from the IRS when they restructure or record losses … it’s a feature of the tax code and has been for ages. But absent the discussion on taxes, it’s important to realize that the “profitability” of AIG these days is very much dependent on a favorable filing with the IRS. That’s not encouraging for investors.
Despite this recent asset sale, taxpayers aren’t off the hook completely just yet. AIG is currently 53%-owned by the government, and the stock offering would reduce that to just 20%. AIG CEO Benmosche claims the government will be out of the insurer by 2013, but there’s still plenty of potential for meddling or share dilution if the government decides to cut and run at a bad time..
While three pillars of property, life insurance/annuities and mortgage insurance drive the AIG train, there’s still some overhang from the complicated mess of the old AIG. Take the airplane leasing business ILFC, which AIG still owns. AIG filed to take it public last year, but the IPO plan has languished amid weak markets (thanks Facebook).
Previous offerings were a fraction of the size of this Treasury sale — with 164 million shares floated in August and some 500 million on the docket this time to reach that $18 billion price tag advertised on Sunday, depending on the price agreed upon for the secondary offering.
It’s also worth noting that while some secondary offerings for AIG went well, others flopped. Consider that in May, the stock was trading over $34 and then the Treasury announced a secondary offering. Shares fell to around $27 about a month later. The stock has fought back lately, but those kind of declines are still worth noting.
AIG is like any turnaround story: There’s no way to know for sure whether this will be a winner or a loser because so many moving parts are involved. These secondary offerings make for big news events, but the broader reshaping of this company has been a grueling multi-year affair, and we still have a few more years to go before we’ll see what American International Group will become.
For myself, I’m not inclined to stick around and find out. My investment strategy rarely involves buying fixer-uppers, and I would rather own the best house in a bad neighborhood — say, the strongest materials stock despite secular weakness in the sector — than a ramshackle company that’s either a big profit center or a big money pit.
If you like fixer-uppers, AIG isn’t all that bad a story. It has the backstop of the government still, and the insurance business is a stable, reliable one if AIG can emerge successful on the other side.
But know what you’re getting into. This is a risky gambit that you have to buy and sit on for years and have the guts to see it through.
I’m inclined to seek opportunity elsewhere, both to reduce my risk and to put my money to work in the meantime instead of parking it in AIG until the turnaround is complete or the bust is clear.
But if you like a little adventure and you don’t mind the risks, take a look at this stock.
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.