With all of the positive vibes in the market regarding the surprise buyback announcements of JPMorgan (NYSE:JPM) and Bank Of America (NYSE:BAC), one has to wonder if the market isn't missing the king of the buybacks in the financial sector. These surprise plans for the large banks are nice, but AIG (NYSE:AIG) spent $2.5 billion on buybacks this year by February 11 alone.
The insurance giant has similar stock returns this year as the large banks, but the market should reward the financial strength and capital returns of AIG. With the massive discount to book value, should the market focus more on the financial with the largest yield?
For those investors impressed with the BoA buyback of $800 million and the JPMorgan plan to repurchase an additional $1.88 billion, one needs to remember that AIG approved another $5.0 billion recently. The key to the scenario is that AIG has by far the smaller market cap. Even the smaller BoA has a market cap of $140 billion that is nearly double that of AIG.
In total, AIG returned nearly $12 billion to shareholders in 2015. The company has already added at least another $2.8 billion during Q1 while BoA only returned $4.5 billion to shareholders last year. Even without the stock buybacks, AIG offers a solid 2.4% dividend yield.
For AIG, the quarterly capital returns and corresponding yields work out to the following amounts:
As mentioned above, the amounts all seem massive until one compares the total capital returns to the market cap to derive the net payout yield. AIG has one of the highest yields in the market while BoA and JPMorgan offer rather meager yields in comparison.
AIG Net Common Payout Yield (TTM) data by YCharts
Persistent Book Value Discount
While a lot was made of the reported big loss in Q4, the results didn't really alter the long-term view of the company. The market made a lot out of what was essentially a one-time charge to build reserves into an inability to manage the business that justifies the position of Carl Icahn.
The bizarre part of the disconnect with AIG is that the low-end analyst estimates for the next two years are at least an EPS of $4 each year. At the same time that analysts generally expect the insurance giant to continue building book value per share, the stock trades far below book value. AIG is so cheap that it makes BoA look expensive and JPMorgan as outright crazy for buying stock.
AIG Price to Tangible Book Value data by YCharts
The company continues to make strategic moves to reduce operating expenses, adjust strategies to free up capital, and reduce risk that will improve the consistency of returns.
All of these moves reduce the risks to the business and secure the current book value that will allow for more share repurchases that are accretive to book value.
The key takeaway is that if the stock buybacks of BoA and JPMorgan are enticing, then investors should look at AIG. The discount to book value and strategies to unlock value are all reasons to own the stock towards the lows of the last few years.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in AIG over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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