TipRanks Smart Dividend Newsletter – Edition #29
Hello and welcome to the 29th edition of TipRanks’ Smart Dividend – a weekly Newsletter providing you with investment ideas for safe-bet quality stocks that are outstanding dividend payers, compared to their peers.
Today’s dividend stock recommendation is one of the world’s most prominent insurers, which has continuously demonstrated improved profitability and stable adherence to shareholder interests.
Investment Thesis: Ensuring Stability
In recent decades, the global insurance industry has demonstrated a quiet yet steady growth, reflecting its critical role in providing financial stability and risk mitigation in a rapidly evolving world. This sector, while not always in the spotlight, is a fundamental pillar of economic security, with a market size that continues to expand, driven by global economic development and an increasing awareness of risk management.
The sector is experiencing a gradual transformation, influenced by digital innovation, advanced risk modeling, and a customer-first approach. These changes are reshaping traditional insurance practices, making them more responsive to contemporary needs and expectations.
In the realm of corporate strategy, we see a cautious yet deliberate embrace of diversification and modernization. Companies are refining their portfolios, focusing on core strengths while integrating new technologies and approaches to risk assessment and customer engagement.
For investors, the insurance industry represents a balance of stability and modest growth prospects. It is particularly appealing for income-focused investors, given its tradition of offering steady dividends. The industry’s robust cash flow and prudent management practices underpin this commitment to shareholder returns, making it an attractive option for those seeking reliable income streams in their investment portfolios.
Quality Dividend Stock: This Week’s Top Pick
American International Group, Inc. (AIG) is one of the leading global insurers, which offers insurance products for commercial, institutional, and individual customers in the U.S. and internationally.
The company was established as a general insurance agency in 1919 in Shanghai, China, under the name “American Asiatic Underwriters.” It opened its first U.S. office in New York in 1926, acting under the name “American International Underwriters,” or “AIU.” The business grew rapidly, and in the 1930s AIU expanded to Latin America and Cuba.
In the 1940s and 1950s, the company continued its global and U.S. domestic expansion, which was fueled by strategic acquisitions and joint ventures. AIU changed its name to American International Group, Inc. (AIG) in 1967, and its shares began trading publicly in 1969. The expansion continued in full steam, with the company’s reopening in China, the establishment of the Indian joint venture, and more.
Besides the geographical expansion, AIG broadened its offer suite by expanding internal capabilities, as well as through acquisitions. Unfortunately, the business expansion included taking on tens of billions of dollars of risk associated with derivatives based on mortgages in the 2000s. As a result, AIG suffered a substantial hit during the Global Financial Crisis (GFC) of 2008 and had to be bailed out by the U.S. government.
In the years that followed, the company sold some of its life insurance, reinsurance, and asset management subsidiaries, and by 2012 it fully repaid the assistance it received, with the taxpayers receiving generous interest on their loans to AIG. The company recovered its reputation as a solid, reliable global provider of insurance.
After the company returned to full health, it continued to expand intrinsically and through acquisitions, at the same time offloading businesses it no longer considered aligned with its core strategy, as well as high-risk and low-growth assets. For example, in 2023, AIG sold most of its high-risk reinsurance business to RenaissanceRe Holdings Ltd. (RNR), and its entire crop risk services business to American Financial Group (AFG).
In 2020-2022, AIG performed a spin-off, establishing its retirement and life insurance subsidiary Corebridge Financial as an independent company. The spin-off proceeded with an IPO on the New York Stock Exchange in 2022, yielding $1.7 billion of gross proceeds to the parent company. AIG plans to gradually reduce its stake in the new entity through several secondary share offerings.
Today, AIG is the world’s 11th largest insurance company by annual revenue, and the 7th largest global insurance firm traded on the U.S. stock exchanges. It commands a market capitalization of almost $46 billion, and in 2022 had annual revenue of $56.4 billion and reported net insurance premiums of $25.5 billion. The company has a workforce of over 26,000 employees, serving clients in over 70 countries and jurisdictions.
AIG operates through two primary divisions: General Insurance and Life and Retirement. The General Insurance division, which accounts for about 58% of total revenues, consists of two operating segments: North America and International; it provides commercial and industrial property insurance; general liability, environmental, commercial automobile liability, workers’ compensation, excess casualty, and crisis management insurance products; and professional liability insurance.
Life and Retirement consist of four operating segments: Individual Retirement, Group Retirement, Life Insurance, and Institutional Markets. Individual Retirement sub-segment offers various annuities and retail mutual funds, while Group Retirement offers group mutual funds, individual and group annuities, investment products, and financial planning and advisory services. Life Insurance sub-segment offers universal life and term life insurance in the U.S., as well as life and health products in the U.K. and Ireland. Institutional Markets offers structured settlement and pension risk transfer annuities, stable value wrap products, corporate- and bank-owned life insurance, and guaranteed investment contracts.
AIG is a financially healthy company with a medium-low net debt-to-equity ratio of 21%; that ratio has been significantly reduced in recent years. Its debt is well-covered by operating cash flow, while the interest on its debt is covered by EBIT many times over. AIG’s debt is highly rated by major rating agencies: “BBB+” at S&P Ratings, “Baa2” at Moody’s, and “BBB+” at Fitch, representing the second-highest level of the ratings scope.
The company has been undergoing restructuring, with the sales of non-core, high-risk, and low-margin businesses considerably contributing to its profitability position. As a result, AIG has succeeded in improving its margins from a very low level just several years ago, to the top-tier industry position today. Currently, it maintains a gross margin of 42%, an EBITDA margin of 21%, and a net profit margin of 9%.
The restructuring process, including the decrease in AIG’s holdings in Corebridge and other businesses, has been depressing the company’s revenues. However, the strong performance of the remaining core businesses, coupled with cost optimization measures, has been supporting earnings growth. In the past three years, earnings-per-share increased by over 55% per year, thanks to more efficient operations as well as share repurchases, decreasing share count.
Thus, on November 1, AIG reported its Q3 2023 financial results, delivering a 14th consecutive quarter of EPS surpassing the analysts’ projections. In the quarter, earnings-per-share surged 144% year-over-year, following double-digit growth in the two previous quarters.
In the quarter, AIG’s underwriting income expanded by 264% year-on-year, while its net investment income rose by 30%; total adjusted pre-tax income grew by 82% from Q3 2022. Quarterly results were led by strong performance in the company’s General Insurance division, although its Life and Retirement division also registered a healthy expansion. In General Insurance, North America was responsible for the largest increase in the total number of insurance premiums written, while the International business also showed healthy growth. In Life and Retirement, adjusted pre-tax income growth was led by the Institutional Markets sub-segment.
AIG has been paying dividends since 2013; in the past decade, the company’s shareholders have seen dividend growth of 14% per year, on average. The latest dividend increase was in June when the annual payout was raised by 12%. AIG’s current dividend yield of 2.2% is in line with the Financial sector’s average. However, given its low payout ratio of 24%, the more-than-sufficient coverage provided by its earnings, its solid dividend track record, and the company’s commitment to compensating its shareholders, AIG is expected to continue delivering robust dividend-per-share growth in the years to come.
Dividends are a part of AIG’s balanced capital allocation strategy, which also includes debt repayments, investing in core business growth, and stock buybacks. The company has had a share repurchase program in place since 2022; in August 2023, its scope was increased from $6.5 billion to $7.5 billion. In 2022, AIG performed $5.1 billion of common stock repurchases, lowering the share count by 10%. In 2023, buybacks continued on an opportunistic basis. In the first three quarters of 2023, AIG repurchased $1.94 billion of its shares, with the largest buybacks registered in Q3 2023 ($785 billion). In October, the company added $170 million of buybacks.
AIG’s stock performance has lagged behind its financial results in the past year, as it was considerably impacted by the regional banking crisis of March 2023, which delivered a blow to investor sentiment. While in the past three years, AIG rose 69%, strongly outperforming the iShares U.S. Insurance ETF (IAK), which gained 49% in the same period, this year AIG’s gains have been underwhelming. In the past 12 months, AIG rose by just 3.3%, underperforming the insurance-industry ETF’s 7.5% increase. Notably, since March’s fall, AIG’s shares have strongly rebounded, surging almost 40% from this year’s lows on strong quarterly results and a favorable outlook.
AIG stock is trading at valuations that are in line with the Financial sector averages. However, its TTM P/E of 11.7 and Forward P/E of 9.2 are lower than those of most of its peers in the Insurance industry. In addition, AIG trades below its fair value, given its favorable outlook. TipRanks-scored top Wall Street analysts see an average upside of 13% for the stock in the next 12 months. AIG carries a TipRanks Smart Score rating of 9/10 (“Outperform”) with a “Moderate Buy” recommendation:
To conclude, we view the ongoing restructuring of the company as an opportunity to purchase its stock at attractive valuations. We believe that at the end of the process, a lean, focused, and much more profitable company will see its valuations rise to catch up with its financial performance. Thus, we agree with analysts from Citigroup (C), who said, “The market may be underappreciating AIG’s simplification process and the potential for capital deployment to drive sustainable value creation.”
Meanwhile, with the price-to-earnings ratio below those of its comparable peers and the EPS growth outlook on the rise, AIG presents a value investment opportunity. At the same time, the company’s strong alignment with shareholder interests, reflected in a stable dividend history and robust share repurchase track record, presents AIG as an attractive, long-term income opportunity for dividend investors.
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