American International Group Inc (NYSE:AIG). Three letters that ought to send shudders through anyone who paid even the smallest amount of attention to the financial crisis. Federal Reserve Chairman Ben Bernanke once referred to AIG as an insurance company with a hedge fund attached. When all was said and done, AIG cost the federal government, and the U.S. taxpayer, more than $180 billion in bailout money.
The company has made progress in repairing its balance sheet since then, but is it enough? At least the federal government is completely divested from the company, so American International Group Inc (NYSE:AIG) is its own separate financial entity again. Thinking about investing in AIG yourself? Here are seven things you need to know.
1. AIG is a bank
If you go to the National Information Center, where the Federal Reserve keeps track of and ranks bank-holding companies by total amount of assets held, you’ll see American International Group Inc (NYSE:AIG) on the list. It’s ranked No. 50, which puts it at the bottom, but AIG’s very appearance on the list puts Bernanke’s hedge-fund comment into some perspective.
2. Great year-to-date share-price performance
Accounting for splits and dividends, American International Group Inc (NYSE:AIG)s share price has grown by 21.88% since the beginning of 2013. That’s good performance by any measure. In the past year, it’s grown by 61.50%. That’s phenomenal by any measure. With share-price growth of 34.94% in the last year, even the ever-stalwart Wells Fargo & Co (NYSE:WFC) can’t match AIG.
3. Low valuation
The price-to-book ratio for American International Group Inc (NYSE:AIG) is 0.66. That’s very low: Bank of America Corp (NYSE:BAC) low (0.68). A basement valuation like that can tell you either of two things: One, the company is underappreciated, undervalued, and therefore a great deal; or two, there’s something fundamentally wrong with the company, and the market knows it.
4. Poor return on equity
Return on equity, or ROE, is a measure of management effectiveness, and gives you some notion of how much profit a company generates with shareholder money. American International Group Inc (NYSE:AIG)’s ROE is 6.35% trailing 12 months. That’s low. JPMorgan Chase & Co. (NYSE:JPM), one of the leanest, meanest banks around, has an ROE of 11.55% TTM.
5. A very high price-to-earnings ratio
AIG’s P/E is currently 28.8. That’s very high. To justify a P/E like that, you’d better expect big growth in return. In comparison, JPMorgan Chase & Co. (NYSE:JPM)’s P/E is 9.28. Wells Fargo & Co (NYSE:WFC), another rock-solid financial institution, has a P/E of 11.45. Even the high-flying Goldman Sachs Group, Inc. (NYSE:GS) only has a P/E of 11.21.
6. AIG had a terrible quarter
For the first quarter of 2013, year-over-year revenue and earnings were down 9.20% and 31.20% respectively. None of the Big Four banks came anywhere near that wretched performance.
7. No dividend
I personally don’t look at banks as dividend investments, but some investors do. American International Group Inc (NYSE:AIG)currently doesn’t pay a dividend. JPMorgan Chase & Co. (NYSE:JPM) pays a hearty 2.8%. Wells Fargo & Co (NYSE:WFC) pays an even heartier 3%. Even Goldman Sachs Group, Inc. (NYSE:GS) pays 1.2%: not much, but nice icing on the cake for a solid growth stock.
Foolish bottom line
Rather than persuading me I can get a great company for a steal, instead American International Group Inc (NYSE:AIG)’s low valuation unnerves me: What crisis-related issues lurk on this bank’s balance sheet? And for that matter, why is AIG even a bank?
Throw in the poor ROE and the sky-high P/E, and this just isn’t an investment for the faint of heart — a club to which I belong. I’m bearish on Bank of America Corp (NYSE:BAC) for what may lurk in its dark corners, but I’d take B of A in a Wall Street minute over AIG, even given the strong performance of the stock: The market isn’t always right.
The article 7 Things You Need to Know About AIG originally appeared on Fool.com.
Fool contributor John Grgurich owns shares of Goldman Sachs, and JPMorgan Chase. Follow John’s dispatches from the not-so-muddy trenches of big-banking and high-finance on Twitter @TMFGrgurich.The Motley Fool recommends American International Group (NYSE:AIG), Goldman Sachs, and Wells Fargo. The Motley Fool owns shares of American International Group, Bank of America, JPMorgan Chase, and Wells Fargo and (NYSE:WFC) has the following options: Long Jan 2014 $25 Calls on American International Group.
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