The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, Abbott Laboratories and AbbVie, La Monica does not own positions in any individual stocks.
AIG used to be the company (and stock) we all loved to hate. The insurer needed a massive taxpayer-funded bailout in 2008 to stay alive. And even with the government's help, many investors thought that AIG would never fully recover.
But four-and-a-half years later, AIG (AIG) is once again a Wall Street darling. Forget about how AIG may be Too Big To Fail. It may now be Too Big To Ignore.
The stock passed $40 Monday for the first time since February 2011. Shares are up 12% this year and nearly 25% over the past 12 months. The company replaced Apple (AAPL) as a favorite stock of hedge funds at the end of 2012. The government has also sold off its last remaining shares of AIG ... for a $22.7 billion profit.
And AIG has done all of this by shedding assets to raise capital and focusing on the boring insurance business. No more credit default swaps here.
The company reported an overall operating profit in the fourth quarter of last year despite a $1.3 billion after-tax loss tied to Superstorm Sandy-related catastrophe claims. But that's a forgivable loss. Investors are used to insurance companies getting hit by natural disasters. That's part of the business. Arcane bets on exotic derivatives in its maligned Financial Products division (i.e. man-made disasters) are not.
So can AIG keep rallying?
Amazingly enough, AIG still looks attractive. Shares trade for just 12 times 2013 earnings estimates, in line with its expected annual earnings growth rate for the next few years.
"AIG could be worth $51 a share in our opinion. And that's based on them getting back to the core insurance business," said Jim Ryan, an analyst with Morningstar.
And CEO Robert Benmosche, to his credit, has resisted calls for the company to buy back stock and reinstate a dividend. AIG hasn't paid a dividend since the third quarter of 2008.
In an interview on CNBC late last year, after the government sold off its last piece of AIG common stock, Benmosche said that AIG would consider a dividend or share repurchase program "down the road." But he stressed that AIG needed to prove to regulators that it has enough capital to withstand any future financial stresses.
That's prudent. While it would be nice for AIG to start rewarding shareholders again, why take the risk of doing that right now?
"It is absolutely reasonable for AIG to temper expectations," said Paul Newsome, an analyst with Sandler O'Neill & Partners. "This is a company undergoing serious structural changes. There are still risks."
But if AIG can notch a few more quarters of healthy earnings, Ryan said it might make sense for AIG to bring back the dividend later this year. That could attract even more investors who are hungry for yield in a low interest rate environment.
AIG is just one of several big financial firms that have enjoyed a strong rebound since the dark days of 2008. The six big banks that are arguably still in the Too Big To Fail camp -- Bank of America (BAC), Citigroup (C), JPMorgan Chase (JPM), Wells Fargo (WFC), Goldman Sachs (GS) and Morgan Stanley (MS) have been on fire as well. Shares of those six are up 20% on average during the past year, led by a 32% surge in BofA.
Still, the big banks may continue to be riskier bets than AIG.
BofA is still dealing with legal issues tied to its Countrywide purchase. The JPMorgan London Whale loss is a sign that the Wall Street banks are continuing to put short-term profits ahead of responsible trading.
Of course, AIG's stock may never get back to where it was before the bottom fell out of the market in 2008. This five-year chart (which adjusts AIG's stock price following a 1-20 reverse stock split in 2009) is a stark reminder of how far AIG fell.
But returning to the "glory" days of 2008 is not the point. AIG was involved in things that artificially juiced its earnings and stock price. Growth came at a huge price. The fact that AIG is slimming down and focusing on its main business is a good thing.
"AIG has made substantial progress in selling its non-core assets and it has wound down the most toxic exposure in its Financial Product division," said Austin Hawley, co-director of research at Diamond Hill Capital Management, which owns AIG in several mutual funds. "AIG looks a lot more like a traditional insurance company and it's one of the more premier property and casualty firms in the world."
AIG, by all accounts, has behaved itself under Benmosche. It's really just sticking to plain vanilla insurance. And there's nothing wrong with that.
Bank stocks have been on a tear in 2012. Monday was no different, as shares of big banks pushed the broader market higher.
Bank of America (BAC), Citigroup (C), Goldman Sachs (GS) and Morgan Stanley (MS) all climbed more than 2%, while Wells Fargo (WFC) rallied more than 3%. AIG (AIG) shares were up after the company said it plans to sell its stake in AIA Group, a Hong Kong-based life insurance MOREHibah Yousuf - Dec 17, 2012 12:59 PM ET
The activist investor that helped usher in the Marissa Mayer-era at Yahoo (YHOO) has a new target: Murphy Oil (MUR).
It's not a household name like Yahoo, but Daniel Loeb, the founder of hedge fund Third Point, called the oil and gas conglomerate an undervalued stock. In his third quarter letter to investors, Loeb outlined a case where the stock could pop if management chose to sell certain assets and spin MOREMaureen Farrell - Oct 5, 2012 2:44 PM ET
It's too early to tell whether investors can cash in as the U.S. Treasury cashes out of its stake in AIG (AIG).
But both the government and shareholders can claim hearty returns for now. AIG's stock is up more than 40% since January, even after falling 1% Tuesday. And the U.S. government will earn a profit of $15.1 billion when it sells the bulk of its stake in AIG tonight.
StockTwits traders MOREMaureen Farrell - Sep 11, 2012 3:51 PM ET
American International Group (AIG) said it will buy back up to $3 billion of its stock from the U.S. Treasury Friday as part of the government's offering of $4.5 billion of the insurer's shares on the open market.
The stock sale will move the U.S. government closer to a point where it would own just half of the insurer's shares outstanding. The Treasury Department currently holds a 61% stake in the MOREMaureen Farrell - Aug 3, 2012 4:21 PM ET
A battle is brewing over how the swaps or derivatives market is regulated.
As part of the Dodd-Frank Wall Street reform law, the Commodity Futures Trading Commission agency was tasked with the job of monitoring the $700 trillion derivatives market. Derivatives are the instruments behind JPMorgan's (JPM) recent loss of at least $2 billion and the trades that helped blow up AIG (AIG), Lehman Brothers and Bear Stearns.
But CFTC chairman Gary MOREMaureen Farrell - Jun 7, 2012 5:11 PM ET
|Stop driving these Hondas right now, says regulator|
|Apple patents technology to block your phone camera|
|Nancy Grace leaving HLN|
|Police raid Google's offices in Spain|
|Thanks, Brexit: U.S. mortgage rates tumble to 3-year low|