American International Group: Not High-Yield Portfolio Material

Today we are evaluating American International Group Inc (NYSE: AIG). Is this company worthy of joining our portfolio of superior dividend yielding stocks? Let’s find out.

Company Profile:

From Yahoo Finance

American International Group, Inc., through its subsidiaries, provides insurance and financial services in the United States and internationally. It operates in four segments: General Insurance, Life Insurance and Retirement Services, Financial Services, and Asset Management. The General Insurance segment underwrites various business insurance products, including large commercial or industrial property insurance, excess liability, inland marine, environmental, workers compensation, and excess and umbrella coverages. The Life Insurance and Retirement Services segment provides individual and group life, payout annuities, endowment, and accident and health policies, as well as retirement savings products consisting of fixed and variable annuities. The Financial Services segment offers aircraft and equipment leasing, capital market transactions, consumer finance, and insurance premium financing. The Asset Management segment operations comprise investment-related services and investment products, including institutional and retail asset management, broker-dealer services, and institutional spread-based investment business.

Market capitalization is $ 172.46B.

Company Fundamentals:

Starting with the return on invested capital, the 5 year average ROIC is 5.8% and last year’s ROIC was 6.19%. The return on equity is decent with a 10 year average of 13.13% and a 5 year average of 12.31%.

Equity growth rate has been quite consistent with a 9 year average rate of 14.26% and a 5 year rate of 14.15%.

Earnings per share growth rate has been a bit more volatile with lows of -18.29% and highs of 68.10%. But taking out those 2 outliers, the average rate seems to settle in around 13% which is consistent with the equity growth rate.

Sales growth rates have been decent but on the decline. The 9 year average rate is 17.23%. The 5 year rate drops to 14%. The 3 year rate falls further still to 11.77%, and last year’s sales growth rate was a mere 4.75%. This is not a trend I like to see.

Dividend Fundamentals:

The current dividend yield is 1.01%. I would consider that a below average yield considering that you can earn a dividend yield of 1.98% on the S&P 500 index and a yield of 2.29% on the DJIA.

However, the dividend growth rate seems to make up for it. The 9 year average growth rate is an incredible 22.18%. The 5 year average is a mind blowing 35.08%. However, these numbers are all high due to the dividend growth rate in 2005, which was an astronomical 96.43%. And 2003 and 2004 both had dividend growth rates of 25%.

Now, the dividend payout ratio has been increasing but it is extremely low, from 6% in 1997 to its current 11.78%.
Management has a lot of room to work with this ultra-low dividend payout ratio.

Cash flow growth rates have been excellent, with a 9 year average rate of 12.33% and a 5 year rate of 17.12%.

Valuation Models:

After examining the fundamentals, let’s calculate a model price.

Surprisingly, from a dividend yield perspective, the current dividend yield is on the high side. The 5 year average high dividend yield is only 0.72%. However, over the last two years, the average high dividend yield has been 1.1%. But, if we demand the 5 year average high dividend yield, the model price is $91.44. At the current price of $65.55, this is a very large discount of 28%. However, if we demand the more recent 1.1% yield, you can see that the stock would be trading at a slight premium.

But Benjamin Graham would agree that this stock is trading at a discount. The Graham number is $71.36, which means that Mr. Graham would argue this stock is selling at a discount of 8.14%.

For my discounted present value method, I used the following inputs:

future P/E of 11.32 (the current P/E which is at historical lows)

future EPS growth rate of 13% (although I had estimated a future EPS growth rate of 14.15%, the analysts have forecast a more conservative 13%)

dividend yield of 0.72%

dividend growth rate of 12% (this is much lower than the averages, but I wanted to discount the overly large dividend growth of 2005)

With these inputs, the model price is $61.45. That is just a slight premium of 6.68%.

Check my AIG calculations.

Here is the 1 year stock price chart:

Interestingly enough, this stock seems to have been going sideways. The price is right around the same area as it was 1 year ago. It had a tremendous fall from $72 to $62 but seems to be recovering nicely now.

Conclusion:

The valuation methods seem to have this stock hovering right around its model price. Dividend growth rates are decent and the dividend payout ratio has been ultra low. The current dividend yield is quite low. This one is tough. It does not jump out at me as a contender in our portfolio of superior dividend yielding stocks.

Full Disclosure: I do not own any shares in AIG.