American Express (AXP) Stock Analysis

Visa isn’t the only dividend paying stock you know?   While V is a holding in many dividend growth investors’ portfolios, I wanted to take a look at an alternative option to see if the grass is possible greener elsewhere.  It is time to roll up our sleeves, pull our AMEX card our of our wallet, and analyze American Express Company (AXP) .

Qualitative Assessment

Through review of the American Express’ (AXP) last earnings release, earnings call transcripts, and various articles, I put together the following summary of factors that are impacting the company

Positive Trends:

  • In the last earnings release, management cited that Cardmember spending increased 9%. We are coming off of a unique period in this country which saw consumer spending declined significantly in the aftermath of the financial crisis. It is a positive trend to see consumer spending increase.  This is great news for all players in the credit card industry and the overall United States economy.  Let’s just hope that consumers don’t decrease their savings rate too much!
  • Management is focused on increasing their business cardholders by offering stronger reward products. This could be a potential cash cow considering the way business spend money for traveling employees.  I can attest to this first hand since I travel a lot for my job.   I am able to earn a lot of credit card points by using a personal credit card for all expenses my employer will refund in full.  I selected my business credit card based on the best available rewards points.  If AXP can offer a competitive rewards program and capture the market, their major investment could pay huge dividends.  Trust me; the amount businesses spend on travel can be insane.  There is a lot of fee income to be unlocked by AXP if the rewards are strong enough.
  • The company is continuing to invest in international growth to broaden its customer base. Expanding into areas with a growing middle class or a new consumer-spending driven market will help grow the customer base and challenge the industry’s major competitors.  The company is investing a lot of money on international restructuring, so I would expect many changes and new developments on this subject in the coming periods.
  • Warren Buffet owns 14% of the company. His love for dividends and investment in strong companies is well documented; I don’t think I need to elaborate on this point much more.

Negative Impact:

  • This is not found in an earnings release but is from personal experience. American Express is not accepted by all merchants.  In this plastic world we live in, customers are relying on their credit cards as their main payment source (I won’t dive into this, that’s a whole different argument).  The fact that merchants do not always except an American Express card is a major competitive disadvantage for the company.  Consumers are also driven by convenience and some may forgo earning both a Visa and American Express card, one of which isn’t accepted at every merchant, in favor of owning just a VISA that is accepted everywhere.
  • The company is currently battling the Justice Department over the disclosure of merchant-fees charged by each credit card company. After reading about the lawsuit on in an article published on Motley Fool (“Massive Change Could be Coming at American Express Company” by Patrick Morris), the lawsuit could have a major negative impact on the company.  If the ruling stands the merchant can disclose to the consumer the fees that each credit card vendor charges the business and “encourage” the consumer to use the lower cost card.  This is meaningful considering AXP charges a higher fee to merchants for the various tools it offers its customers.  AXP’s customer based could potentially take a major hit if merchants begin offering incentives for customers to use a lower-cost credit card.  I don’t know all the details of the lawsuit; however the cliff notes that I read do not paint a great picture.

Quantitative Analysis

And now onto the fun part.  Let’s run AXP through the Dividend Diplomat stock screener and see how well it performs against its peers.   I don’t think this will be much of a surprise, but I am going to compare AXP against its two largest competitors, Visa (V) and MasterCard (MA).  These three companies have by far the largest market cap in the credit card services industry and are fierce competitors.

1. Price to Earnings Comparison.  As indicated in our screener, we look for companies that have a P/E ratio below 15.  Unfortunately, none of the companies fit the bill.  AXP has the lowest P/E ratio of the group by a mile; however it is still above the mark used in our screener.  It is worth noting that AXP has a lower P/E ratio than the S&P 500, which is approximately 19 on any given day.   Who know, AXP may fall below 15 if the market continues to slide.

AXP PE comparison

2. Payout Ratio.  There is not too much to say about this metric other than all three companies have low payout ratios.  This has allowed the companies to grow their dividend by such large margins (Read more below) oer the last several years.  The payout ratio still remains relatively low with these increase due to the fact that each company also grows earnings at a comparable rate.  Each company is very far under our threshold of 60% and has a lot of room to continue to grow their dividend going forward.

AXP Payout Ratio

3. Dividend Increases. Again, all three companies have grown their dividend remarkably over their last five dividend increases.   It is weird typing this sentence, but AXP has the lowest dividend increase by a large margin since they only have increased their dividend by 16.83% (on average) over the last five increases.  Any dividend growth investor would love to have that kind of increase in their portfolio.  However,  the increase falls short when compared to the competition.  This is where the Buffett factor comes into play.  I am confident that AXP will continue to increase and maintain their current dividend yield as long as Buffett is a major shareholder.  A growth rate of 16.83% is sustainable in the industry since earnings also grow at a similar rate.  On the other hand, while the growth rates have been remarkable, I question whether V and MA can maintain the current dividend growth rate in the long run.  At some point we will see their growth rate fall in line with AXP’s rate.

AXP Div Growth Rate

Summary

After performing my analysis, I have decided not to initiate a position and will instead just monitor the company going forward.   After reviewing the companies market position and reading into the litigation the company is facing, it is easy to see why the company is trading at a discount compared to its peers (P/E is 7.38 less than V and 10.59 less than MA).  Even with the discounted price, the company is still trading at a higher P/E ratio than the P/E used in our screener.    In the past I have made exceptions and purchased stocks at a P/E greater than 15 and I only do so to purchase a company with a strong track record (such as PG).  With the current market environment presenting opportunities in other dividend stalwarts  such as Aflac (Lanny recently purchased some shares of the duck) and McDonalds, I think my extra capital can be better invested elsewhere.  I also do not want to purchase any shares in the company until more information is available about the potential impact of the lawsuit with the government.  It has the potential to severely impair the domestic customer base and will place a lot of reliance on the company’s growth abroad.

Does anyone hold shares in American Express?  Am I being to cynical about the litigation’s impact on the company’s future earnings?  Please let me know your thoughts, comments, and feedback.

Bert

DISCLOSURE: I DO NOT RECOMMEND ANY DECISION TO THE READER or ANY USER, PLEASE CONSULT YOUR OWN RESEARCH. THIS IS ACTUAL DATA, ANALYSIS, HOWEVER I BASE NO INVESTOR RECOMMENDATION.  THANK YOU FOR YOUR UNDERSTANDING.
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13 thoughts on “American Express (AXP) Stock Analysis

  1. From personal experience, I like the customer services from AMEX Singapore. Whenever requested to waive the card renewal annual fee, most of the time, they will. Just today, had a wonderful chat with them on the phone. Not only waived the annual fee, they even thank me for holding their card for 17 years by giving me 2 complimentary movie tickets.

    Wonderful analysis you had DD. Thanks for the sharing.

    • Thanks for stopping by and the kind words! I’m glad you’ve had a great experience with AMEX. How could you be upset with a $0 annual fee. Now you have some more income to invest in the market! When I would read articles about the company their customer experience was always raved about. I am sure the quality of their service and the responsiveness is why their fees are a little more expense for individuals and businesses than the other companies. Maybe I should have added that in the positive trends column. Are you invested in any of the credit card companies?

      Thanks again for stopping by.

  2. I have AXP on my watchlist, and own V and MA. I like AXP, it’s a very strong brand. With these type of companies, there’s always ongoing litigation. V and MA have ongoing ones too. I think Warren Buffett profit nicely from AXP’s salad oil scandal. I just wished the price was much cheaper. One day, hopefully soon. Great analysis!

    Cheers.

    • Henry,

      Thanks for commenting on the article! The brand is very strong and has been an American staple for a long time. Hopefully the company can successfully expand overseas and tap grab a share of the market. I agree with you financial companies are always under a microscope and have a big target on their head (Whether it is fair or not). This one seemed alittle more damaging to me than the others in the past, especially if merchants can begin to encourage customers away from the product. I am always looking for the best deal; so if a consumer offers me a discount to use my Visa instead of AMEX I will take the deal every day of the week.

      Do you have any entry point to purchase shares of AMEX? You are pretty diversified in the industry already. I am jealous of the dividend growth you have been getting from V and MA.

  3. HI Bert,
    A nice review of Amex. I have some AXP shares although I’m not planning to add to them at the moment since the yield is too low.I use my Amex card as my primary credit card but I still have to have a Visa card too as you point out since there are some locations which don’t accept Amex. In the US it’s not too bad, but in Europe, it can be a different story since Amex isn’t at widely accepted there.

    As I understand the litigation, Visa and MasterCard settled and basically changed their agreements allowing merchants to promote cash over use of a card? Since Visa and MasterCard only service payments and don’t hold cards; I’d think they’d be just as affected as Amex could be, if not more, since Amex can earn income from credit card interest. I’ve seen gas stations offering cheaper prices when paying cash than credit so ultimately it comes down to what the consumer will choose. Online merchants and payments I imagine would be unaffected, especially after all the cyber security threats against debit cards. In other words – a definite maybe! 🙂

    Best wishes,
    -DL

    • Dividend Life,

      Thanks for the kind words and stopping by. The litigation is complex and tricky. One of the things I find the most interesting about it is that V/MA are on board with the litigation and settled while AXP is still fighting it. I just wonder what is different for AXP that is causing them to continue to battle? To me it signals that they have a lot to lose from the result of the litigation. But you are right in your assessment that online merchants will not be impacted. I bet you AXP will start offering more discounts (such as 10% cash back if you enter the merchants website from Americanexpress.com) to try and continue to drum up additional revenue.

      Who knows in all of this. I don’t blame you for passing on adding them. Keep up the great work and cheers to your next investment. Thanks again for stopping by!

      Bert

      • Hi Bert,
        Yes, they’ve already started doing this in the sense that I receive monthly specials for some stores such as “save $10 if you spend more than $50 at Home Depot”. Since I own both HD and AXP stock and needed to buy some garden products, I took advantage of that one 🙂

        Best wishes,
        -DL

  4. Nice Analysis…Thanks for sharing! By the way, I maintain a collection of dividends stock analyses and have added your analysis of AXP to the list.

    Wishing you nothing but success in your own journey! AFFJ

  5. Here the UK, I know of one, yes ONE place in my town that accepts AMEX, whereas literally everywhere accepts Visa and MasterCard. Small shops sometimes request a minimum purchase if paying by credit card, and some even charge you a small fee if you want to use one! There are lots of rewards available on all three cards, bit given the lack of acceptance of the AMEX, I don’t know of any British friends who actually have one. The other thing is, AMEX is a charge card, not a credit card. MasterCard are offering crazy amazing rewards right now, like 3% off fuel/transport. Given our petrol (gas) costs something like US$8.30 per US gallon, 3% off is very welcome!

    • Wow. Thanks for sharing that about AMEX. Through my research I read it was rarely used in Europe but I didn’t expect it to be like that. Have you seen any new advertisements, lowering of fees, or greater acceptance in your town to try and increase the cardmember base?

      Thanks again for the insight. I am all for taking the best reward package that is available. You have to save as much as possible with the free money that is given to you!

      Bert

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