AIG Has 30% Upside from Here

NEW YORK (TheStreet) -- If you didn't already know it, American International Group (AIG) is back and back in the black. For the few remaining doubters, AIG's earnings report on Thursday solidified its position as a company on solid footing.

For the second quarter of 2013, operations produced $1.12 in earnings, over 31% above the average estimate near 85 cents. Thursday was the seventh beat in a row and outperformed 2012 and 2011 comparable periods.

Revenue is vaulting higher with an increase of 6.7% from last year's second quarter, now reaching $17.32 billion, well above estimates. After the company held out its hand and received a $182 billion liquidity injection, debt has been a monkey on the insurer's back. But the long-term debt continues to fall and stands at $48.5 billion, down from $73.9 billion last year.

The U.S. Treasury Department now stands with zero shares and $22.7 billion more from its investment in AIG. Not exactly a bailout that anyone can claim cost taxpayers any money any longer. The key debt-to-capital ratio fell under 20% and is now 17.7%. This is fantastic news for shareholders and leaves little doubt that the shares are positioned to continue higher.

One billion dollars is the amount AIG's board authorized to spend to buy back shares. I don't normally agree with share buybacks. In my mind, most buybacks represent a failure by the management to find better uses of the capital. On top of that, most boards buy high and sell low, the opposite of what shareholders want.

In AIG's case, it makes absolute sense to buy back shares while they are cheap and can increase earnings per share in future quarters with the positive cash flow. Their size is already an issue, as demonstrated by the Federal Reserve's edict AIG is "systemically important" and under increased regulation from the government's Financial Stability Oversight Council.

AIG has a market cap of about $72 billion based on a share price of $49 and 1.48 billion shares outstanding. When put into that perspective, a $1 billion buyback doesn't quite have the same ring to it, but it's a perfect move, and I anticipate a stock price tailwind even if they don't purchase the full amount authorized (often the case after companies announced buybacks).

Adding a cherry on top is the resumption of a quarterly dividend. Starting at 10 cents a share, it's the first regularly scheduled dividend since September 2008, when the company paid $4.40, the same month shares fell from a split-adjusted high of $485 down to a closing price of $58.32.

That was then, and this is now, and analysts currently have a price target in the neighborhood of $49 a share. A price that we are now experiencing during Friday's trading. The highest analyst price target is near $60, and I strongly believe that's way too low. AIG may not double in the next year, but $65 for a 30% increase is hardly a stretch. My short-term price target is $55 before we celebrate the New Year, $65 one year from now.

If you missed out on the run up from last year, consider a few shares on a dip for the upside potential.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Robert Weinstein is an active trader focusing on the psychological importance of risk mitigation, emotion and financial behavior of market participants. Robert co-founded the investing blog StockSaints, where he writes a journal about his trading activity and experiences.

In addition to TheStreet, Robert also contributes to Real Money Pro, providing real-time trading ideas for stocks, options and futures.

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