Sasha Jovanovic
4 min read
American International Group has delivered a solid multi year share price gain, which naturally raises a question for anyone looking at the stock today. Is the current valuation properly tied to the returns AIG earns on the capital it deploys across its insurance and investment operations, or has sentiment moved ahead of those economics.
-
Over the past 5 years the stock has returned 69.1%, which puts real weight on whether the underlying return on capital story fully supports that outcome.
-
AIG’s business relies heavily on how efficiently it can turn policyholder float and shareholder funds into profitable underwriting and investment outcomes, so shifts in those returns can directly shape what a fair price for the shares looks like.
-
What if you looked at American International Group through its earnings instead? See why American International Group’s 13.1x P/E tells a different valuation story.
The issue now is whether the price investors see on screen is well aligned with the returns American International Group earns on its capital base.
If you are weighing American International Group against other ways to put capital to work, it can help to see how similar return profiles compare across 34 high quality undervalued stocks.
Does American International Group Look Undervalued on Excess Returns?
The Excess Returns model looks at how much profit American International Group can earn above the return that equity investors are asking for. It starts from book value per share, what that capital is expected to earn, and what is left after covering the cost of that equity.
For American International Group, the model uses a Book Value of $74.96 per share and a Stable EPS of $8.64 per share, based on estimates from 10 analysts for future return on equity. Against a Cost of Equity of $6.02 per share, that leaves an Excess Return of $2.62 per share, built on an average Return on Equity of 10.38%. The projections also point to a Stable Book Value of $83.18 per share, again drawing on analyst expectations for how the capital base compounds over time.
Those inputs together suggest the Excess Returns estimate sits substantially above the current share price of $82.86. This implies the market is pricing American International Group more cautiously than the model’s return profile would indicate. Find out what American International Group could be worth using our Excess Returns estimate.
The American International Group Narrative: What Would Justify Today’s Price?
Simply Wall St Narratives pick up where the valuation puzzle for American International Group leaves off. They spell out which assumptions about American International Group’s future growth, margins, and earnings would need to hold for the stock to be worth meaningfully more or less than today’s price. Each one treats fair value as a thesis about the business that can be tracked over time, rather than a one off snapshot on the Community page.
