American Express (AXP) is a credit and charge card issuer and processor. Most of its customers pay off their cards monthly and so the company is more of a payments processor than a consumer lender, asserts Shawn Allen, contributing editor to Gordon Pape's Internet Wealth Builder.
Some 62% of its revenues are from the discount fees that it charges to merchants, which average 2.43%. About three-quarters of its revenues and earnings derive from the U.S. Its market share of credit cards in circulation globally (excluding China) is only 2.2% but it has a 9.2% share of total payments.
American Express has wonderful economics, as it acts like something of an electronic toll booth on its 9.2% share of a massive market.
As a smaller player that charges higher fees to merchants than do the bank issuers of credit cards, it is perhaps less certain that American Express will be able to defend its market share and profitability. Nevertheless, it is still growing, and it seems likely that it will continue to be very profitable into the future. Buffett has often praised the company and Berkshire Hathaway (BRK.B) owns 18% of its shares.
Boosted by the Trump tax cuts, Amex's adjusted earnings per share have surged about 40% in the past year but were somewhat lower at 19% in the latest quarter. This came after several quarters of declining earnings due to the loss of the Costco co-branded card in 2016
In September, the quarterly dividend was increased by 11% to $0.39 per share ($1.56 per year). The dividend yield is 1.5%. The stock is up 6.1% in 2018, from $99.31. The stock has risen quite steadily since early 2016 after a sharp decline in 2015. It is currently down somewhat from its recent all-time high of $114.55.
Based on my analysis price of $107.48, Amex is trading at 14.7 times trailing adjusted earnings. Its return on equity is very high at 32%. Reflecting the elevated ROE, its price to book value ratio is high at 4.7. The dividend yield is low at 1.5% partly because the dividend payout amounts to only 21% of trailing earnings.
Fourth-quarter earnings should be strong, boosted once again by the Trump income tax reductions. American Express is benefiting from the continuing switch to electronic payments. It seems reasonable to assume that earnings could grow in the order of 9% in 2019. While the stock is vulnerable to regulation of its fees and possibly to disruption, we rate the shares a buy.
