By Jack Barnes
American International Group Inc. (AIG) provides insurance services to an international market place. In 2008, the company was bailed out of its positions by the U.S. government, which owned 92% of AIG at its peak.
AIG last week priced new equity, allowing the government to unwind some of its position. The U.S. Treasury sold 200 million shares, or 15% of its AIG stake on Tuesday, but still has 77% ownership of the insurer and another 1.5 billion shares to sell before it is fully out of its investment.
That means this is just the first of many liquidity events. And you don't want to own a stock when you know that a company's largest equity holder is on a mission to get out of its position. Long-term weakness will prevail in this case.
So it's time to "sell" AIG -- until the U.S. government finishes diluting current shareholders by dumping its equity. AIG has a number of other hurdles to overcome as well.
- High levels of new property insurance claims are coming.
- A glut in old inefficient aircraft is going to affect leasing rates for fleet owners like AIG.
- The U.S. government's equity sales will provide short sellers liquidity to put on new shorts.
- And the global economy continues to struggle, leaving franchises struggling.
The wild weather of this spring has generated some of the largest and most destructive tornado storms in modern history. The price tag on these events is still unknown, but it is growing daily. AIG could be facing a new round of very costly property claims as a result.
Meanwhile, high energy prices -- specifically the cost of distillates like jet fuels -- have forced airlines to temporarily or permanently ground their most inefficient aircraft ahead of schedule. This has resulted in a glut in jet aircraft on the world's markets.
AIG, through its International Lease Corporation, is one of the largest owners of older and newer commercial aircraft in the world. Now, at these fuel cost levels, it is seeing a growing percentage of its fleet become undesirable.
In the coming quarters, AIG will be paying out more cash than it takes in. This means it will be looking to price additional secondaries as quickly as it believes the market has digested the last ones. This will weigh on the stock price going forward as the company seeks to increase its real cash levels. Furthermore, the current economic crisis in Europe isn't over, and that leaves AIG's international business model exposed to contagion issues should the European Union or European Central Bank have a crisis in confidence.
Indeed, the future of AIG is still in doubt, as it spins off assets and absorbs hits to the value of its remaining assets. If you own AIG, it's time to get out before the losses get worse. AIG shares closed Friday virtually flat, up 12 cents, or 0.42%, at $28.87. That's just off it's 52-week low of $27.50 and well below its 52-week high of $62.87.