ModernGraham Valuation: American International Group (AIG)

moneyCompany Profile (obtained from Google Finance): American International Group, Inc. (AIG) is a global insurance company. The Company provides a range of property casualty insurance, life insurance, retirement products, mortgage insurance and other financial services to customers in more than 130 countries. It diverse offerings include products and services that help businesses and individuals protect their assets, manage risks and provide for retirement security. It earns revenues primarily from insurance premiums, policy fees from universal life insurance and investment products, and income from investments. Its segments include AIG Property Casualty and AIG Life and Retirement. During the year ended December 31, 2012, the Chartis segment was renamed AIG Property Casualty and the SunAmerica segment was renamed AIG Life and Retirement.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass all 6 of the following tests: Score = 2/6

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Earnings Stability – positive earnings per share for at least 10 straight years – FAIL
  3. Dividend Record – has paid a dividend for at least 10 straight years – FAIL
  4. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
  5. Moderate PEmg ratio – PEmg is less than 20 – FAIL
  6. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS

Enterprising Investor – must pass all 3 of the following tests or be suitable for a defensive investor: Score = 2/3

  1. Earnings Stability – positive earnings per share for at least 5 years – FAIL
  2. Dividend Record – currently pays a dividend – PASS
  3. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value $38.14
MG Opinion Overvalued
Value Based on 3% Growth $14.36
Value Based on 0% Growth $8.42
Market Implied Growth Rate 21.45%
PEmg 51.40
PB Ratio 0.76

Balance Sheet – 9/30/2013 

Total Debt $42,231,000,000
Total Assets $540,744,000,000
Intangible Assets $0
Total Liabilities $441,951,000,000
Outstanding Shares 1,472,340,000

Earnings Per Share

2013 (estimate) $5.62
2012 $4.44
2011 $8.60
2010 $14.75
2009 -$86.30
2008 -$753.90
2007 $47.80
2006 $107.00
2005 $79.80
2004 $75.00
2003 $70.60

Earnings Per Share – ModernGraham 

2013 (estimate) $0.99
2012 -$55.04
2011 -$107.79
2010 -$155.37
2009 -$200.66
2008 -$201.51

Conclusion:

American International Group is a company that is coming out of a very dark point in its history.  At this point in the turnaround, the company has yet to satisfy Defensive Investors or Enterprising Investors.  Defensive Investors look at a ten year history and require positive earnings and dividend payments throughout that period, but since American International Group had such large losses at the heart of the financial crisis, the Defensive Investor is not yet comfortable with the company.  Enterprising Investors look at only a five year history, so they are much closer to accepting the company as a potential investment, but the loss in 2009 still eliminates the company from contention for this investor type.  Therefore, Intelligent Investors seeking to follow Benjamin Graham’s value investing methods may wish to seek other opportunities by reviewing ModernGraham’s list of Defensive and Enterprising Companies.  From a valuation standpoint, the company has seen some growth, but the market is currently implying a growth rate above what has been seen historically.  As a result, the company appears to be overvalued at this time.

What do you think?  Do you agree that American International Group is overvalued?  What would be your assessment?  Is the company not suitable for Defensive Investors or Enterprising Investors?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author did not hold a position in American International Group (AIG) at the time of publication and had no intention of changing that position within the next 72 hours.

Photo Credit:  Andrew Magill


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