The entire financial sector has been punished thus far in 2016, and American International Group Inc (AIG) stock has been no exception. So far, it is down 16% this year, and just a shade above its 52-week low.
Luckily for investors, AIG stock is now a must own.
The reasons to own it have little to do with its business model or corporate strategy. Fact is that AIG is an enormous, mature insurance provider that is going to grow according to the economy coupled with the generosity of regulation as it relates to the financial/insurance space.
Therefore, AIG’s investment appeal lies in cost cutting, capital returns and valuation — all of which bode well for this stock.
2 Big Reasons to Buy Now
Earlier this year, AIG unveiled its corporate strategy, and included within was a plan to return $25 billion to shareholders over the next two years. Of that $25 billion, approximately one-third will be used for dividends.
The company is already making good on this promise, upping its quarterly dividend payout by 14.3% after its most recent quarter. AIG stock now pays a yield of 2.5% over the next year.
Given that AIG has hiked its quarterly payout from 10 cents to 32 cents over the last three years, chances are that this dividend will once more increase as part of the company’s two-year plan.
In addition to a significant dividend hike, AIG also unveiled a new $5 billion buyback authorization, bringing its total buyback plan to $5.8 billion. That amount is good for nearly 10% of the outstanding share count. Assuming that the company buys back stock at a rapid rate, this authorization has the potential to create significant buying pressure in AIG stock.
In other words, AIG stock just became a high-yield investment with a significant buyback plan that protects from further downside and can spark upside gains. Prior to AIG’s fourth-quarter announcement, neither of these two catalysts applied, as the $800 million remaining on its buyback authorization was insignificant relative to its market cap and its yield was below the SPDR S&P 500 ETF (SPY).
Icing on the Cake for AIG
AIG stock has instantly become more attractive after adding a $25 billion capital return plan to the mix. When combined with its cheapness, this is presenting a truly great long-term investment opportunity.
AIG stock’s book value per share rose 4.3% year-over-year to $72.97 during its most recent quarter, reflecting a much-improved business. Currently, shares trade around $52. That means it would have to trade higher by 40% just to reach its book value per share.
In comparison, Travelers Companies Inc (TRV) trades 39% over its book value per share, thereby illustrating the high degree of value that exists in AIG stock.
Nevertheless, AIG stock is clearly cheap, and when coupled with its strong dividend yield and healthy buyback, it is clear that now is the time to buy.
As of this writing, Brian Nichols does not own any of the aforementioned securities, but may initiate a position in AIG in the next 72 hours.
