7 Things You Need to Know About AIG
Jun 4th 2013 10:24PM
Updated Jun 5th 2013 7:15AM
AIG . Three letters that ought to send shudders through anyone who paid even the smallest amount of attention to the financial crisis. Federal Reserve Chairman Ben Bernanke once referred to AIG as an insurance company with a hedge fund attached. When all was said and done, AIG cost the federal government, and the U.S. taxpayer, more than $180 billion in bailout money.
The company has made progress in repairing its balance sheet since then, but is it enough? At least the federal government is completely divested from the company, so AIG is its own separate financial entity again. Thinking about investing in AIG yourself? Here are seven things you need to know.
1. AIG is a bank
If you go to the National Information Center, where the Federal Reserve keeps track of and ranks bank-holding companies by total amount of assets held, you'll see AIG on the list. It's ranked No. 50, which puts it at the bottom, but AIG's very appearance on the list puts Bernanke's hedge-fund comment into some perspective.
2. Great year-to-date share-price performance
Accounting for splits and dividends, AIG's share price has grown by 21.88% since the beginning of 2013. That's good performance by any measure. In the past year, it's grown by 61.50%. That's phenomenal by any measure. With share-price growth of 34.94% in the last year, even the ever-stalwart Wells Fargo can't match AIG.
3. Low valuation
The price-to-book ratio for AIG is 0.66. That's very low: Bank of America low (0.68). A basement valuation like that can tell you either of two things: One, the company is underappreciated, undervalued, and therefore a great deal; or two, there's something fundamentally wrong with the company, and the market knows it.
4. Poor return on equity
Return on equity, or ROE, is a measure of management effectiveness, and gives you some notion of how much profit a company generates with shareholder money. AIG's ROE is 6.35% trailing 12 months. That's low. JPMorgan Chase , one of the leanest, meanest banks around, has an ROE of 11.55% TTM.
5. A very high price-to-earnings ratio
AIG's P/E is currently 28.8. That's very high. To justify a P/E like that, you'd better expect big growth in return. In comparison, JPMorgan's P/E is 9.28. Wells Fargo, another rock-solid financial institution, has a P/E of 11.45. Even the high-flying Goldman Sachs only has a P/E of 11.21.
6. AIG had a terrible quarter
For the first quarter of 2013, year-over-year revenue and earnings were down 9.20% and 31.20% respectively. None of the Big Four banks came anywhere near that wretched performance.
7. No dividend
I personally don't look at banks as dividend investments, but some investors do. AIG currently doesn't pay a dividend. JPMorgan pays a hearty 2.8%. Wells Fargo pays an even heartier 3%. Even Goldman Sachs pays 1.2%: not much, but nice icing on the cake for a solid growth stock.
Foolish bottom line
Rather than persuading me I can get a great company for a steal, instead AIG's low valuation unnerves me: What crisis-related issues lurk on this bank's balance sheet? And for that matter, why is AIG even a bank?
Throw in the poor ROE and the sky-high P/E, and this just isn't an investment for the faint of heart -- a club to which I belong. I'm bearish on B of A for what may lurk in its dark corners, but I'd take B of A in a Wall Street minute over AIG, even given the strong performance of the stock: The market isn't always right.
But if you'd like more in-depth analysis on the insurance giant, check out this premium report -- written and researched by The Motley Fool's Financials Bureau Chief, Matt Koppenheffer. In it, Matt breaks down the key issues you need to know and understand if you want to successfully invest in this stock. Simply click here now to claim your copy, and you'll also receive a full year of key updates and expert analysis as news continues to develop.
The article 7 Things You Need to Know About AIG originally appeared on Fool.com.Fool contributor John Grgurich owns shares of Goldman Sachs, and JPMorgan Chase. Follow John's dispatches from the not-so-muddy trenches of big-banking and high-finance on Twitter @TMFGrgurich .The Motley Fool recommends American International Group, Goldman Sachs, and Wells Fargo. The Motley Fool owns shares of American International Group, Bank of America, JPMorgan Chase, and Wells Fargo and has the following options: Long Jan 2014 $25 Calls on American International Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a gripping disclosure policy.
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