AIG and the $29 ceiling
Last week the US Treasury sold a further 14% of their holdings in AIG for $29 a share, reducing their ownership from 77% to 70%. This was on the heels of AIG selling down their interest in AIA and the sale of Alico which, together, allowed the return of a significant amount of capital to the Treasury owed under the terms of the 2008 bailout. It seems AIG is finally moving out from under a rock!
Of the 207 million shares sold by the Treasury last week, AIG bought back half, or 103.5 million shares. That’s 3.5% of outstanding shares, and they were repurchased at just over ½ book value. Generally I’m not fond of buybacks because they are often made with the worst timing; when companies are generating excess cash their share price is not usually near historic lows nor are they selling below book value. With AIG it’s a bit different. As I said, shares are trading at just over ½ book value. This means that last week’s buyback was accretive in terms of book value per share; the 3.5% buyback resulted in a 5.7% increase in book value for the remaining outstanding shares, with book value per share growing from $55.33 to $58.52. What did the share price do in the wake of the announcement? It immediately fell! Why? Because shareholders were reminded that the Treasury still has 1.2 billion shares they are eager to dispose of. The famous ‘overhang’. But wait a minute, the share price action doesn’t make sense. AIG had enough cash on hand to buy back a significant number of shares without increasing its debt load. Maybe they can continue to do this over the next couple of years using free cash flow. Seems to me like a great strategy to increase shareholder value. There’s a nice post regarding where this might take the share value over on the Corner of Berkshire and Fairfax discussion board. Get’s me a little excited. The value enhancement isn’t going to happen tomorrow so there’s time to mull this idea over and see what happens next time the Treasury sells another stake. If some of my current positions reach their sell targets in the coming months as anticipated I may have enough liquidity to both build my cash reserves and increase my AIG position, which is already by far the largest holding in my portfolio. At the moment I just don’t see any better opportunities out there!