If you have read some of my previous articles, you know that I tend to focus on high yield issues. I believe that for a conservative investor, or one who is retired, regular monthly/quarterly income is a great goal.
AIG is one of the most loved (and hated) stocks in the market these days. They received a government bailout, which was decried as a waste of money at the time, even a scandal and received much criticism. Ultimately, however, the deal seems to have brought a tidy profit to the federal government of over $22 billion!
Now the stock is held by many large hedge funds and money managers. In fact, Factset reported in November, 2012 that among the top fifty hedge funds cumulatively, AIG was the fourth largest holding. Bruce Berkowitz's Fairholme Funds held 80 million shares at the end of the third quarter of 2012, comprising some 37% of his portfolio. There are certainly those betting the other way, with 6.9% of the shares held short.
So what is an investor to do? AIG seems to be a firm with fantastic potential and some risk. I say, take a different angle and turn this growing company into an income investment. Current estimates are for a 21.9% growth rate in earnings for the next five years, according to Yahoo Finance:
The company intends to pay a dividend and has stated an intent to improve its coverage ratio in order to raise its credit rating.
How do we make this an income play? In my opinion, AIG is not a company headed for a fall but should gradually improve its performance and its finances. I have chosen to look at AIG as an income play and purchased the 7.70% Series A-5 Junior Subordinated Debt (AVF). This issue is exchange traded debt with a par value of $25. At the current price of $25.72 (at the time of writing) the yield is 7.49%. The security has often traded closer to $25.25 and that may be a better entry point closer to par. The increase in yield, however, would only be to 7.62%, a small increase so it may not be worth the wait. This issue is not likely to provide capital appreciation.
In this time of the Fed trying to push the public into riskier investments by keeping interest rates low, this may be a good way to pull some yield out of a well-known and growing company.