Over the next few weeks, I hope to do an individual valuation of each of the components of the Dow Jones Industrial Average.Â For a brief overview of the Dow, please see our Glance at the Dow – a snapshot of the valuations on March 10.Â When I have completed the individual valuations, I will put together another overview.
Company Profile:Â American International Group (AIG) (obtained via Google Finance)
Business and Management Review
1) Is the business simple and understandable?
Insurance is a business that is very simple and understandable.Â Value investors are taught to love the insurance business because of its tremendous simplicity and its strengths.Â Insurance is wonderful because the company is able to take in premiums and invest the funds, keeping the profit on the investments after any claims are paid out.Â American International Group is primarily an insurance company and is thus a simple and understandable company.
AIG has a long history in the insurance business, and that operating history has remained consistent and constant over its history.Â Financially, the company has achieved a positive net income for over 10 years and has paid a dividend for many years.
Robert Willumstad has been the Chairman of AIG since November of 2006.Â Over that time, the company has had less than stellar performance, though the circumstances of the financial market have had a significant effect on the performance.Â Mr. Willumstad seems to have a firm grasp on the companyâ€™s issues within the economy and it appears that his strategies for overcoming the credit crunch will help the company in the long term.
The company has the standard investor relations page, with earnings reports, webcasts, etc.Â In addition, the letter from the chairman in the 2007 Annual report indicates honesty between management and its shareholders as they did not try to mask the poor performance of the company in 2007.
The market cap of American International Group is $110 billion.Â Pass.
The companyâ€™s current ratio (actually we used the total assets and total liabilities instead since this is a financial institution and does not easily lend itself to current ratio use) is about 1.099, below the 2.0 requirement.Â Fail.
The company has had a consistently positive net income for over 10 years.Â Pass.
AIG has consistently paid a dividend for over 10 years.Â Pass.
Earnings have grown more than 1/3 over the last 10 years.Â Pass.
With a PE ratio (using our Methods) of 13.05, the requirement of under 20 is met. Â Â Pass.
The Price to Book ratio for AIG is 1.19, lower than our 2.5 limit.Â The multiple of PE to PB is lower than our requirement of 50.Â Pass.
Having passed 6 of the required 7 tests for the defensive investor following Benjamin Grahamâ€™s value investing strategy, we believe American International Group may be suitable for the defensive investor.
The companyâ€™s current ratio (see defensive investor section on current ratio) is below 1.5.Â Fail.
The company has achieved a positive net income for over 5 years.Â Pass.
The company currently pays a dividend.Â Pass.
Earnings are greater today than they were 5 years ago.Â Pass.
The price is less than 150% of the net tangible assets.Â Pass.
Having passed 4 of the required 5 tests for the enterprising investor, we feel that American International Group may be suitable for the enterprising investor following Benjamin Grahamâ€™s intelligent investor guidelines.
Since the company is currently trading at about $49, we feel it is undervalued at the present time andÂ may be a suitable investment for the defensive or enterprising investor.