Charge Ahead with American Express

09/22/2014 8:00 am EST

Focus: STOCKS

Patrick McKeough

Editor, Successful Investor

Our latest US stock feature is a company that started up in 1850 and is now one of the world’s largest issuers of payment cards, with 109 million cards in over 130 countries, notes Pat McKeough, editor of Wall Street Stock Forecaster.

American Express (AXP) issues two types of cards: charge cards, which have no pre-set spending limit and must be paid in full each month; and traditional credit cards, which let users carry a balance.

Unlike Visa and MasterCard, which simply process transactions, Amex is also a bank that accepts deposits and makes loans. The company cuts its credit risk by mainly catering to clients with above-average incomes and good credit histories.

The company’s revenue rose 35.5% in the wake of the recession, from $24.3 billion in 2009 to $33.0 billion in 2013. Earnings shot up 150.8%, from $2.1 billion in 2009 to $5.4 billion in 2013. Due to fewer shares outstanding, earnings per share rose 216.9%, from $1.54 to $4.88.

Amex continues to restructure its travel agency operations; this business has suffered as cost-conscious corporate clients cut back on travel and consumers book hotels and flights online.

As part of this restructuring, Amex recently merged its Global Business Travel division into a new 50/50 joint venture with a private consortium. It realized a $409-million after-tax gain on the deal.

Meanwhile, the company also aims to grow by diversifying its customer base. It has teamed up with Wal-Mart Stores (WMT) to launch a new prepaid, reloadable debit card called Bluebird. Amex feels Bluebird users will upgrade to its regular cards as their incomes improve.

The stock trades at 16.2 times the $5.51 a share that Amex will probably earn this year. That’s a reasonable p/e ratio in light of the company’s well-known brand and affluent clientele.

Thanks to its strong earnings, Amex recently raised its quarterly dividend by 13.0%, to $0.26 a share from $0.23. The new annual rate of $1.04 yields 1.2%. The company also plans to repurchase up to $4.4 billion worth of its shares in 2014, plus an additional $1.0 billion worth in the first quarter of 2015.

We also note that billionaire investor Warren Buffett owns 14.3% of the company. We rate American Express a buy.

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