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) 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.

AIG's shares were down 1% in afternoon trading to $34.61, however, this was on a day of otherwise strong results for the broad market and the financial sector. The broad indexes were all showing 2% gains, after European Central Bank president Mario Draghi said that the ECB was ready to buy unlimited quantities of short-dated Spanish and Italian bonds in the secondary market if either Rome or Madrid requested a full International Monetary Fund-style reform program.

There was also good economic news at home, with ADP reporting that nonfarm private employers added 201,000 full-time employees during August, increasing from an upwardly revised 173,000 in July.

When considering AIG's motivations in announcing a smaller-than-expected sale of AIA shares and authorizing a disappointing share buyback, Nadel echoed Shanker's concerns about the Federal Reserve stepping in, saying "it seems plausible to us that regulators may have informed AIG that it shouldn't push its capital mgmt activities any higher."

Nadel added that if the AIA sale comes in at $2 billion and the AIG common share buyback at $5 billion, "our 2013/14E EPS could fall from current $3.65/$4.30 to about $3.32/$3.90, respectively, or a cut of about 9%."

AIG's shares trade for 10 times the consensus 2013 earnings estimate of $3.48 a share, among analysts polled by Thomson Reuters.

AIG Chart AIG data by YCharts

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-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

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 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.

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