Am I the only one who just cannot reconcile this?
AIG (AIG) reported for the 2007 first quarter, AIG reported net income of $4.13 billion or $1.58 per diluted share. First quarter 2008 adjusted net loss, was $3.56 billion or $1.41 per diluted share, compared to adjusted net income of $4.39 billion or $1.68 per diluted share for the first quarter of 2007.
AIG also announced a plan to raise approximately $12.5 billion in capital to fortify its balance sheet and provide increased financial flexibility. The capital is to be raised through a common stock offering and an equity-linked offering for an aggregate of approximately $7.5 billion. At a later date AIG also expects to issue high equity content fixed income securities. These offerings are designed to further strengthen AIG’s significant financial resources and will enhance its ability to grow while maintaining the strength to withstand potential short-term market volatility.
Commenting on first quarter 2008 results, AIG President and Chief Executive Officer Martin J. Sullivan said, “AIG’s results do not reflect the underlying strengths and potential of AIG; rather they reflect the extremely adverse external conditions affecting the spectrum of companies exposed to the U.S. residential housing, credit and capital markets. The sizable unrealized losses and decline in partnership income were among the key drivers impairing our overall net performance. With that said, it is important to underscore that our operating strategies are working well in our core insurance businesses. We believe that our businesses provide an attractive foundation for growth for AIG over the long-term. As part of this effort, we are taking appropriate strategic actions to ensure our businesses are well positioned to capitalize on opportunities provided by the current environment.
“While we anticipated a difficult trading environment, the severity of the unrealized valuation losses and decline in value of our investments were beyond our expectations. Current market conditions also contributed to a significant decline in partnership income compared to a record level in the first quarter of 2007, as well as to declines in mutual fund income. However, the underlying fundamentals of our core businesses remain solid, and several performed quite well in the quarter, despite the challenging environment many faced.”
Now, of course the “underlying fundamentals of the business” are strong. You are an insurer and last I checked the insurance business was still ok. It is your performance in that business that was horrible and does not look to improve soon. Contrast this to Owens Corning’s (OC) results earlier this week that were very good in a industry that is current depressed. Given a choice between the two, I will take the latter.
Here is where it gets weird. Why is AIG announcing a 10% increase in the dividend? Why? This will cost $2.2 billion a year, an increase if $200 million. Not that much, but with a 6.8% dilution of shares coming up due to the offering, that amount will jump to $2.35 billion a year (not including whatever interest will be paid on the new convertible to be issued).
Now, if you need to raise $12 billion (10% of your market cap), you cannot also increase the dividend. How about keeping it and diluting shareholders less? They are going to be paying 6% to 8% on whatever is issued so the additional $200 million a year borrowed will cost another $12 to $16 million a year in interest to shareholders. The stock only yields 2% so it is not like we are talking big bucks for shareholders. Cutting it 10% would have saved $200 million.
This is just a sadly transparent attempt to pacify shareholders into thinking things are much better than the numbers would appear to prove.
Disclosure (“none” means no position):None
