American International Group Inc: AIG Stock Is Still a Buy

Some look at American International Group Inc‘s (NYSE:AIG) five-year 150% gain and then assume the best days have come and gone. However, those same people don’t realize that AIG has reduced its share count by nearly 45% in the same span, and that its valuation has only increased 43% in five years. That’s half the S&P 500‘s gain.

American International Group Inc: AIG Stock Is Still a Buy

Fact is that AIG is not the same company it once was. The company is leaner, more profitable and creates significant value for shareholders via stock buybacks and dividends.

Before its most recent earnings beat, I said that AIG stock is the perfect investment for value investors. While AIG stock has jumped another 10% since that call, it still remains true today.

AIG’s Rebirth

AIG stock is the perfect example of activism at its best. Carl Icahn wanted the company broke into three separate businesses. CEO Peter Hancock responded with his own plan that divided the company into two pieces and kept its favorable tax attributes.

AIG has optimized its capital structure by spinning off its mortgage insurance unit and selling its broker-dealer network. As part of the plan, AIG said it would return $25 billion to shareholders and cut $1.6 billion in costs.

During its last quarter, we saw the effects of these changes on full display. AIG’s profits rose 6% year-over-year despite having a far smaller business with 6% less revenue, as operating costs fell 11%. And because AIG has bought back $6.2 billion worth of stock in the first six months of 2016, its book value per share and profits are still driven higher.

With that said, every facet of AIG’s business improved during the second quarter. This helped AIG’s return on equity, a very important metric for large insurers, to rise to 8.6% from 6.8% last year. Keep in mind that AIG’s goal is to be at a 9% return on equity by the end of next year. Clearly, that goal looks attainable right now.

Bottom Line for AIG stock

At the end of the day, AIG is a very difficult business to understand. However, its willingness to downsize and rid itself of businesses that previously weighed on the company’s bottom line is making it easier to understand, reducing its capital requirements, and is allowing it become a far more efficient company.

Thus, the bottom line is that AIG stock is in fact a great investment. This is a company whose book value per share has risen to $75.45, versus under $60 where AIG stock currently trades. This, coupled with a forward price-to-earnings multiple of just 10 illustrates how cheap AIG truly is, even after its big run higher.

With that said, AIG stock has performed so well in years past because of those big buybacks. And the company just approved an additional $4 billion to its buyback plan. Therefore, AIG is better positioned as a company than it has been post financial crisis. Its margins are higher, business is less complicated, and its buybacks are larger than ever.

Furthermore, its current forward P/E ratio is about 40% lower than it was this same time last year. That’s because of AIG’s earning power, it being a smaller business with fewer costs and because AIG is buying back stock in such a ferocious manner. Considering these things, it is obvious that AIG stock is still a great long-term investment opportunity.

As of this writing, Brian Nichols did not hold a position in any of the aforementioned securities.

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