Mad Mr. Market and AIG
AIG announced 1st quarter earnings last Thursday after the market closed that handily beat Wall Street expectations. Shares tanked on Friday. Late Friday the US treasury announced that it will sell another tranche of its holdings in AIG, about 9% of outstanding shares, or 163.9 million to be precise. At the same time AIG announced that it would be buying about $2 billion worth of this offering. Yesterday, Sunday May 6, the underwriters priced the offering at $30.50 per share, some 7% below Friday’s close. This morning in pre-market trading, Mr. Market is marking down the shares of AIG to a level below the secondary offering. Why? You’ve got me! I guess it’s supply and demand. Yet, AIG will be buying back 65.6 million shares at 55% of book value which will increase the book value of remaining shares by about $1.00, to something like $58.75. As a shareholder I’m ecstatic that management seems to keep allocating capital in a way that continually increases book value by, among other things, buying back shares when the stock is below book. How many other corporate share buybacks take place under similar circumstances? Not many. Usually buybacks are done because management is flush with cash, and that unfortunately happens when a company’s stock is already greatly ‘appreciated’ on Wall Street, i.e. trading at a significant premium to book.
Yes, there are a lot of unknowns about AIG. Will they be able to sell ILF (and buy back moe shares at below book)? Will the sale of Maiden Lane III assets be successful and generate cash for AIG? No one really knows for sure. But if there weren’t so many unknowns the shares wouldn’t be trading at 1/2 book value. I do believe, however, that management has demonstrated good capital allocation skills so far and that puts them head and shoulders above a number of other leading US corporations.
We’re going into a difficult period for the market in general (European election results, indications of slowing economic growth in the US, et al.) so it’s harder than usual (read impossible) to know what Mr. Market will do in the near future. So far, he’s showing his usual manic self, at least as regards AIG. I’m sorely tempted to increase my already large holdings in AIG if Mr. Market bids the shares down to under $30.00. Remember that AIG is not for the faint of heart; it could fall to $25 again or leap up to $40 next week. I really don’t know what Mr. Market will do, but I believe that the divergence between book value and market price will eventually shrink. Let’s hope it’s not the book value that shrivels!
Do your own due diligence!