In this article, we are focusing on the strengths and weaknesses of American International Group (NYSE:AIG), as well as comparing it to Chubb (NYSE:CB). Although the two companies are of very different sizes, with AIG having a market cap of $75 billion versus a market cap of $20 billion for Chubb, we realize that many investors apportion capital based on sector and sub-industry. So, with the two companies both sitting in the GICS sector of financials, as well as the same GICS sub-industry of property and casualty insurance, we feel it could be a useful and worthwhile comparison.
After experiencing some tough times during the recession, AIG appears to be bouncing back towards much stronger levels of profitability. For example, last year it was able to post a return on equity of 8.5% and return on assets of 1.1%. Sure, these figures may not be exceptionally high right now, but they are increasing at an encouraging pace. For instance, AIG's bottom line increased by 12.5% last quarter alone, and the company is forecast to deliver earnings growth of 11% next year, which is above the wider index average and is, therefore, relatively impressive.
Meanwhile, Chubb scores well in terms of profitability, with the company being able to post slightly better return on equity and return on assets figures than its larger rival. Indeed, its return on equity was 14.6% last year, while its return on assets figures was 4.7%. Like AIG, it is expected to increase EPS by 11% next year, which shows that there is growth potential not just at AIG but across the property and casualty insurance sub-industry, too.
Clearly, financials have needed to get their income statements and balance sheets in order over the last few years, so it is of little surprise to find that neither AIG nor Chubb is particularly generous when it comes to sharing profits with investors. For example, Chubb pays out just 22% of profits as a dividend, while for AIG, this number is even lower at only 6%. Still, AIG yields a surprisingly adequate 0.9%, while Chubb's yield of 2.1% is understandably better. However, we feel that the potential for a much higher payout ratio, alongside strong growth prospects mean that AIG, in particular, could become a sought-after income play over the medium term.
Both companies have identical forward P/Es of 10.4, which highlights the high value on offer in the property and casualty insurance sub-industry. Indeed, their P/Es are 36% lower than that of the S&P 500 at present, which has a P/E of 16.2. However, other valuation ratios highlight that AIG may be undervalued relative to its sub-industry peer. For example, its 5-year PEG ratio is a hugely impressive 0.97, which is just below the much sought-after 1.0 level, while Chubb's PEG is 1.95. Furthermore, AIG trades at a price-to-book ratio of just 0.73, which shows good value on an absolute basis, while it also appears to be relatively undervalued based on this metric, since Chubb's price-to-book ratio is much higher at 1.31. In addition, AIG's EV/EBITDA ratio of 6.55 is 8% lower than the 7.12 of Chubb. As a result, we feel that AIG could be undervalued relative to its sub-industry peer, Chubb.
We're impressed with AIG's improving profitability. Sure, its return on equity and return on assets numbers were behind those of Chubb last year, but the company is showing strong growth and impressive potential, as highlighted by its strong quarterly numbers and upbeat earnings forecasts for next year. Furthermore, we feel that AIG has huge potential when it comes to dividends. It currently yields just 0.9%, but only pays out 6% of profits as a dividend. As profits increase, we expect to see dividends do likewise, with them having the potential to benefit from an increasing bottom line as well as an increasing payout ratio.
In terms of valuation, we feel that AIG is currently undervalued relative to Chubb. Although their forward P/Es are the same, AIG offers a significant discount to its sub-industry peer when it comes to the price-to-book, EV/EBITDA and PEG ratios. As such, we think that AIG could outperform Chubb going forward as the market reacts to what appears to be a mispricing and bids up the price of shares in AIG.
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Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.