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AIG Plans $5 Billion Buyback (Update 1)

Updated with afternoon market action, economic news, and comment from Sterne Agee analyst John Nadel.

NEW YORK ( TheStreet) -- American International Group (AIG - Get Report) on Thursday announced that it was selling up to $2 billion in shares of AIA Group Ltd. to a group of private investors, partially funding a new authorization for AIG to buy back up to $5 billion in common shares.

AIG spun-off AIA Group of Hong Kong in 2010, netting about $20.5 billion at that time, and selling another $6 billion worth of the shares in March.

AIG's $5 billion share repurchase authorization is expected to be acted upon quite soon, through another deal to repurchase common shares held by the U.S. Treasury. Following a repurchase of about $3 billion government-held shares in August, the government was left holding 53% of AIG's shares, which were worth about $31.9 billion, as of Wednesday's close, at $34.81.

Deutsche Bank analyst Joshua Shanker early on Thursday reiterated his "Buy" rating for AIG, while raising his price target by $2 to $42, saying that he now expects the next government sale of AIG shares "to be a large offering," that "AIG will be a significant repurchase," and that "a repurchase of $10 billion would be book value per share -accretive by $7-8."

While raising his price target for AIG because of the expected increase in book value, Shanker expects the Federal Reserve "to exercise its jurisdiction" over the company, and "request a moratorium on further capital management activities until it can author and apply a stress test to AIG's capital adequacy."

Following the next government offering and AIG buyback, Shanker expects AIG to suspend share buybacks until the second half of 2013, causing him to lower his 2013 EPS estimate for the company to $3/60 from $3.90.

Although the government has sold some common shares held in bailed-out companies into the open market, its slow strategy to unwind from AIG through company buybacks has been working out well for all parties, as the shares have risen 50% year-to-date through Wednesday's close.

Sterne Agee analyst John Nadel later on Thursday said that AIG's shares were "likely to come under considerable pressure," since "both the sale of AIA and the buyback authorization are meaningfully below both our and consensus expectations." The analyst had been factoring a sale of AIG's full $7 billion AIA stake and a $9 billion common share buyback into his earnings estimates.

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