AIG Stock Rises 12.1% YTD: Should Investors Hold or Fold?

Shares of American International Group, Inc. (AIG) have seen an increase of 12.1% in the year-to-date period. However, this growth is lower than the multiline insurance industry average of 24% and the S&P 500 Index's rise of 27.2%. Currently, AIG's stock is trading 6% below its 52-week high of $80.83.

When comparing to peers, MetLife, Inc. and Marsh & McLennan Companies, Inc. have performed notably better, with increases of 29.2% and 21.3%, respectively.

AIG Stock YTD Price Performance Comparison

Image Source: Zacks Investment Research

Looking at valuation, AIG is trading at a premium compared to the industry average. It currently holds a forward 12-month price/earnings ratio of 11.57X, which is higher than its five-year median of 9.69X and the industry average of 9.48X.

In contrast, MetLife and Marsh & McLennan have forward 12-month P/E ratios of 8.90X and 24.6X, respectively.

A premium valuation typically suggests strong confidence in a stock's future prospects. Thus, it is crucial to examine AIG’s operations and financial health to see if this premium is warranted or if investor expectations are too high.

Behind AIG’s Growth Story

AIG's growth can be attributed to various factors, including strengths in returns on investments, a solid premium base, and careful expense management. The company has been seeing an increase in income from fixed-maturity securities and alternative investments, which boosted its investment income by 13.7% year over year to $973 million in the third quarter.

To streamline operations, AIG has been divesting non-core businesses, which allows for a sharper focus on its core insurance operations. Key initiatives include deconsolidating Corebridge Financial, Inc. (CRBG) and selling off Crop Risk Services and Validus Re. These changes aim to reduce volatility in their portfolio, improve liquidity, and expedite capital deployment.

With adjustments in its business mix, effective cost control, and an improved premium base, AIG's expense ratio is expected to decrease. The company's AIG Next program is projected to deliver consistent annual savings of $500 million.

AIG is also committed to returning capital to shareholders. In 2023, the company allocated $3 billion for share buybacks and paid out $1 billion in dividends. This trend continued in 2024, with AIG repurchasing $4.8 billion worth of shares in the first nine months and distributing $765 million in dividends. Furthermore, in May 2024, AIG raised its quarterly dividend by 11%. This focus on shareholder returns underlines the company’s confidence in operational progress and its commitment to enhancing investor value.

Such initiatives are likely to help mitigate negative factors AIG is facing and support its long-term growth trajectory.

What Are the Negative Factors for AIG Stock?

However, AIG's considerable debt is a challenge to its growth outlook. As of the third quarter, the company’s long-term debt totaled $9.89 billion, significantly exceeding its cash balance of $1.47 billion, which dropped slightly from $1.54 billion at the end of 2023. Moreover, AIG’s net debt-to-capital ratio is considerably higher than the industry average.

Additionally, AIG’s return on equity (ROE) stands at 8.63%, well below the industry average of 15.38%. This disparity indicates less efficiency in using shareholders' funds to generate profits.

AIG’s Earnings Estimate Revision

The Zacks Consensus Estimate for AIG's earnings per share for 2024 has recently declined by 1.2%, now standing at $5.12. Over the past 60 days, there have been three downward revisions and one upward revision for this estimate.

Nonetheless, AIG managed to exceed earnings expectations in three of the past four quarters, with an average surprise of 2.9%. However, it did miss estimates once during this period.

Should You Stick With AIG Stock for Now?

Considering the favorable elements outlined, AIG could be a stock worth keeping in your long-term investment portfolio. Presently, it trades below the average price target of $84.72 per share set by Wall Street analysts, which suggests an upside potential of about 11.53% from current prices.

AIG's improving business operations, increasing investment returns, and disciplined spending make it well-positioned for future growth. Therefore, holding onto this stock, currently rated Zacks Rank #3 (Hold), appears to be a sensible decision. New investors, however, may prefer to wait for a more attractive entry point while monitoring the company's efforts to strengthen its balance sheet.

AIG, Stock, Growth, Investment, Market