Here at Profitable Trading, we’re always on the lookout for catalysts that can help deliver quick and robust gains for a stock. Oftentimes, these catalysts are hidden from view, and we have to dig pretty deep to spot them. Other times, these catalysts stare us right in the face. They are practically begging to be noticed, even as the rest of the market may be focusing elsewhere.
Robert Benmosche, the CEO of American International Group, Inc. (NYSE:AIG), went on CNBC last May and laid out a pair of time-tested stock catalysts: “As we continue to work on our capital plan and work with the Federal Reserve, our next priority would be to put a dividend on the stock, because we think that will increase the potential buyers. We’re also looking at potential stock buybacks, as we progress through the year.”
Dig a little deeper and you’ll understand why this insurer can afford to make those bold promises. American International Group, Inc. (NYSE:AIG) has emerged from the financial crisis of 2008 in far stronger shape than anyone could have envisioned. Five years ago, this insurer was mired in debt and in dire need of a government bailout.
Though the bailout ended up salvaging the company, and though it even paid back all the money it borrowed from Uncle Sam, it has been an arduous climb back to relevance. At the end of 2008, total debt stood at $193 billion, forcing the company into a series of asset sales just to stay afloat. A company that had a $79 billion revenue base back in 2007 is now half the size.
The good news: Total debt has fallen sharply, to below $50 billion, and the two remaining divisions, a U.S. life insurer (SunAmerica) and global property casualty insurer, are quite healthy, and throwing off prodigious amounts of cash flow.
It’s hard to understate the impact of American International Group, Inc. (NYSE:AIG)’s revamp on its balance sheet. At the end of 2008, at the depth of the financial crisis, tangible book value stood at -$9 a share. That negative figure, implying a shareholder deficit and no shareholder value, would usually mean a fatal blow for most other banks or insurers. But American International Group, Inc. (NYSE:AIG) was “too big to fail” thanks to its role in global finance.
Well, the company has subsequently rebuilt the balance sheet. Tangible book value rebounded to $17.35 a share in 2009 (due to those asset sales that fetched high prices), and ongoing free cash flow has pushed tangible book value $67 a share. Merrill Lynch’s analysts see that figure rising to $85 a share by 2015.
Note that this stock currently trades near $45, meaning shares trade for just two-thirds of current book value. Any time you spot a company offering a share buyback when shares trade below tangible book value, you should pounce, as buybacks can push book value per share figures even higher (as the share count shrinks even faster than book value). With shares currently trading at such a deep discount to book, American International Group, Inc. (NYSE:AIG)’s buyback is a no-brainer.