NEW YORK (
) -- Shareholders of
American International Group
will need to show a little patience before riding the buyback gravy train again.
Up until Monday, when the U.S. Treasury Department sold $18 billion worth of AIG shares at a price of $32.50 a share, the government was taking a steady approach this year in unloading its holdings of the insurer's common shares, which it received in April 2009 in exchange for $69.8 billion in preferred shares as part of the insurer's massive bailout.
Before Monday's sale, the Treasury controlled 53% of AIG's common shares, after previous government offerings of common shares in March, May and August were repurchased by AIG. Those benefited all shareholders -- including the government -- by reducing the share count and pushing up earnings estimates, along with the share price.
The Treasury now has a minority stake of 21.5% in the company.
AIG's shares were up 44% year-to-date through Monday's close at $33.30.
When AIG last week announced it would sell up to $2 billion in shares of
AIA Group Ltd.
, partially funding a new $5 billion share buyback authorization, some analysts who had anticipated much higher buybacks were disappointed, however, there was no indication of just how big a block of shares the Treasury might sell.
The Treasury's decision to dump an additional $13 billion in shares, on top of what AIG bought back, signals that the government no longer thinks the slow approach to unwinding its position is in the best interests of taxpayers.
holds its next round of stress tests for very large "systemically important" financial institutions early next year, AIG will be included among the companies required to submit detailed capital plans to the regulator. Sterne Agee analyst John Nadel -- who rates AIG a "Buy," with a $39 price target -- said last week that regulators may have already "informed AIG that it shouldn't push its capital
management activities any higher."
Too big to fail.
After AIG faced a liquidity crisis and appeared unable to meet collateral requirements for its credit default swap counterparties, the Federal Reserve and the Treasury began the company's epic bailout. At the time, few envisioned a happy ending for the insurer.
Weiss Ratings senior financial analyst Gavin Magor says that "any company facing AIG's 2008 disaster would have loved to have been granted four years and limitless government cash."
"In return for the bailout, AIG was initially being forced to break up the conglomerate," he says, "but the company was granted an indefinite stay of execution, which they took full advantage of, to maintain their leadership in many area of insurance, especially in price-sensitive areas like property and casualty, where there were rumors of complaints that they were underpricing the market, simply to gain control."
Taxpayers bought AIG the most valuable thing on Wall Street: time.
In return, with Monday's sale of AIG shares, the "Treasury and the Federal Reserve have now recovered a combined total of $194.7 billion" from the AIG bailout, including profits on the sale of shares and interest payments on loans, "representing a positive return of $12.4 billion to date compared to the original combined $182.3 billion commitment," according to the Treasury.
Underwriters have the option to purchase an additional 83,076,922 shares over the next 30 days, which could bring the government an additional $2.7 billion.
Treasury Secretary Tim Geithner said that "taking action to stabilize AIG during the financial crisis was something the government should never have had to do, but we had no better option at the time to protect the American economy from the damage that would have been caused by the company's collapse,"adding that "to stabilize and then restructure the company with a very substantial positive gain for the American taxpayer is a significant accomplishment, but we need to continue the critical task of implementing Wall Street reform so that the American economy is never put in this position again."
Be that as it may, it's all water under the bridge for investors, who need to decide if holding shares in AIG is still a good deal.
At Monday's close, AIG's shares traded for less than 10 times the consensus 2013 EPS estimate of $3.47, among analysts polled by Thomson Reuters. Among 18 analysts polled, 10 rate the shares a "Buy," while the remaining eight have neutral ratings. That's a pretty strong vote of confidence, and the consensus price target of $38.21 implies another 15% upside for the shares.
Sterne Agee analyst John Nadel last week called AIG's announcement of the sale of $2 billion AIA shares "a much smaller portion than expected," and said there was "no obvious answer" as to why the company didn't sell more of its $7 billion stake in the Asian insurer.
On the bright side, AIG has at least $5 billion more in potential fuel for additional buybacks, once the company navigates its first round of Federal Reserve stress tests next early next year.
Interested in more on Capital One Financial? See TheStreet Ratings' report card for this stock.
Written by Philip van Doorn in Jupiter, Fla.
Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.