American Express (AXP, Financial) is a thriving financial services business that has made several acquisitions to ensure its long-term success. Warren Buffet is a sharerholder of the stock, and it's easy to see why even the legendary Oracle of Omaha likes it. Not only is it a big player in the card payments industry, it is also a world-renowned financial institution with branches located in 130 countries.
The company offers customers charge and credit card services for business and personal use. Its world-recognized brand and renowned customer service play a major role in gaining new card members and earning merchants' loyalty. American Express enjoys a competitive advantage due to its extensive network of cardholders and merchants. This enables it to offer various services and products, such as charge cards, credit cards and travel services.
Over the last few years, American Express has been committed to staying competitive by advancing its digital abilities and offering unequaled customer service in the ever-changing payments industry. The company has been investing heavily in mobile and digital technologies like mobile payments and digital wallets to stay ahead of the curve. As a result, it has deepened its collaboration with other partners to stay market-relevant and introduce more services.
Moreover, American Express is trading at a great bargain, with a price-earnings ratio of 18. This is much cheaper than competitors MasterCard (MA, Financial) and Visa (V, Financial).
Setting the stage for multi-year growth
As mentioned above, American Express is making many investments in its future in order to drive long-term growth. For example, on Jan. 12, American Express announced the takeover of Nipendo, a service that simplifies and automates B2B payments. This acquisition provided customers with an easier and more streamlined experience with business payments. By completing the acquisition of the B2B platform, American Express hopes to create an end-to-end solution and use it as a jumping-off point to develop more capabilities for buyers and sellers. This will enable them to access additional features and benefits.
On Jan. 9, American Express and Microsoft (MSFT, Financial) announced an expansion of their partnership that will revolutionize expense management systems. This new suite of solutions promises an upgraded end-to-end payment experience. Microsoft's AI system has been designed to automate the tedious manual process of expense reporting and approval and magnify audit efforts. It simplifies the procedure of reconciliation and reimbursements for accounting staff. Initially, it will be available for Microsoft's employees only and then extended to American Express' customers.
These collaborations are expected to impact profits positively, and when combined with other prevailing macroeconomic forces, they should contribute to the stock's positive momentum.
External tailwinds
The recent relaxation of travel restrictions in China has presented a major opportunity for American Express. With the lifting of restrictions, American Express is poised to benefit from the increased travel and commerce resulting from the influx of Chinese travelers. As the world's largest issuer of charge cards, American Express stands to gain substantially from this influx and is well-positioned to reap the rewards.
In addition, the data suggests that the inflation rate is slowing down in the U.S. In December, the CPI decreased to 6.5% from November's 7.1%. This marks a sixth consecutive year-over-year slowdown in inflation numbers. On a monthly basis, December saw the first decrease in prices since May 2020, with a 0.1% drop from November.
With the Federal Reserve recognizing positive results from efforts to combat inflation, it has taken a step back and is reducing the speed of rate hikes. Investors anticipate that the Fed will pause its rate hikes as the economy slows and instead focus on other measures to support growth.
The Federal Reserve recently raised the benchmark Federal Funds rate by a quarter-point, bringing the target range to 4.5% to 4.75%. This is the highest level seen since 2007 and marks a significant increase from 0% to 0.25% at the start of 2021. However, the increase was slower than in previous hikes. That should help to bring consumer spending back to its former levels.
Luxury focus
American Express has become synonymous with luxury, making it one of the leading credit card companies in the world particularly for wealthier customers. Despite recent market fluctuations, if a recession occurs, American Express is better positioned to weather the storm than its peers thanks to its wealthier customer base.
American Express' Platinum cards are known for their excellent rewards programs, luxury benefits and other value-added services, even with an almost $700 annual fee. Wealthy people are willing to pay these fees because for them, they save money overall due to their high spending levels.
Additionally, American Express customers tend to have better credit scores. For example, the Amex Blue Card requires a credit score of 670 (considered good) for approval.
American Express maintained a high level of credit quality during most of 2022. This stems from their strategic emphasis on catering to premium customers, which has kept net write-offs and overdue loans much lower than before the pandemic.
American Express's success was apparent in 2022, when revenue increased by 25% from the preceding year, compared to Visa and MasterCard's growth of 18.5% and 17.8%, respectively. This exemplifies American Express' remarkable resilience and ability to outpace competitors. Plus, American Express experienced a surge in new business, witnessing the addition of 12.5 million new card accounts, with millennials and Gen Z leading the growth.
And the growth story is not over. American Express issued an optimistic outlook for fiscal 2023, predicting its revenue will increase by 15-17% in 2023 alongside earnings per share of $11-$11.40.
Decent shareholder returns at a discount
Over the past five years, American Express has been incredibly successful in the stock market as it returned around 80% in cumulative capital gains, significantly higher than S&P 500's 48.48% growth rate during the same period.
American Express is not known for its dividend yield. Currently, it offers a relatively low dividend yield of 1.17%, far below the median of 3.59% for credit services companies within the industry, according to data tracked by GuruFocus.
However, to close out last month, American Express declared a $0.60 per share quarterly dividend, a substantial 15.4% increase from the prior dividend of $0.52. The financial services corporation has announced that the raised dividend will begin to apply from the first quarter 2023.
A double-digit increase in dividend payout is an impressive achievement, especially in the current economic climate. Moreover, the company's payout ratio leaves plenty of room for continuous growth even further; American Express's dividend payout ratio is incredibly low, at around 0.21.
In addition, American Express has focused on capital returns via stock buybacks; in the past decade, its share count has reduced from 1.141 billion to 752 million.
Despite the potential upside and strong shareholder returns, American Express is trading at a price-earnings ratio of just 18, as mentioned above. Meanwhile, Visa (V, Financial) and Mastercard (MA, Financial) have higher price-earnings ratios of 31.3 and 35.3, respectively.
Takeaway
Overall, I believe American Express offers the perfect combination of dividend returns, share repurchases and extensive capital appreciation at a discount. American Express stands out from its competitors in the present economic conditions due to its wealthier customer base and has seen higher revenue growth compared to them.
