Merrill Lynch Really Likes AIG Earnings, Dividend and Buyback

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The research team at BofA/Merrill Lynch is all over the earnings, dividend and stock buyback news from American International Group Inc. (NYSE: AIG). The firm is reiterating its Buy rating, but more importantly it is raising its price target to $56 from $49 for the next 12 months.

AIG handily beat earnings on Thursday night. The $1 billion stock buyback announcement, as well as the $0.10 reinstated common stock dividend, both were sooner than the market was expecting. They may have expected this to come after the sale (or initial public offering) of the company’s aircraft lease outfit.

The analyst report on the AIG target price increase said:

The increase reflects a higher book value as well as an increase in our assumed multiple for the life segment (110% of book from 90%) and property/casualty (75% of book value from 70%). We continue to use a sum-of-the parts approach.

Earnings estimates have been raised as well: from $3.90 to $4.30 per share in 2013 due to the beat. The team also noted that the life insurance and the P&C segments beat expectations, as each were helped by alternative investment earnings. Friday’s report also noted that the P&C unit continued to make progress in improving its loss ratio, as the accident loss ratio improved for the seventh straight quarter.

Merrill Lynch said about the dividend and buyback:

We view the announcement favorably and are as focused on the signal it sends as we are the amount. The return of a more active capital management strategy is an important milestone in the turnaround of AIG.

AIG shares were up 3.25% at $48.60 in early Friday trading, after hitting a 52-week and post-recession high of $49.50 on Friday.