American Express (AXP) is well known as the third largest credit card issuer. Unlike Visa (V) and MasterCard (MA), Amex mostly issues its cards directly rather than by partnering with banks, explains Shawn Allen, contributing editor to Internet Wealth Builder.
American Express traditionally focused on "charge cards", where its mostly affluent customers are required to pay off their balances in full each month. In 2018, 57% of its revenues were from the average 2.36% discount fees that it charges to merchants and 23% was from interest charged to its card holders.
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 due to its more affluent customer base it has a 9.2% share of total payments.
Like Visa (V) and MasterCard (MA), American Express has wonderful economics, as it acts like something of an electronic toll booth on its 9.2% share of a massive market. Due to the structure of the credit card system, merchants mostly have no real choice but to accept credit cards despite the high discount fees.
Credit card companies compete with other on the basis of card rewards and marketing and simply do not face pressure to compete by lowering their discount fees.
In fact, higher discount fees allow higher rewards to card holders. This all works out wonderfully for the credit card companies and those card holders who avoid paying interest but does not work out so well for the merchants.
Boosted by the Trump tax cuts, Amex's adjusted earnings per share surged 24% in 2018 but was lower at 7% in the latest quarter as it "lapped" some of the impacts of the tax reductions. The fourth-quarter earnings growth was moderately lower than analysts expected but the stock was little changed on the news.
In September, the quarterly dividend was increased by 11% to $0.39 per share ($1.56 per year). The dividend yield is 1.5%.American Express bought back 3% of its shares in 2018. It has been aggressively buying back its shares for many years.
The result of this is dramatically illustrated by the fact that Berkshire Hathaway's (BRK.B) ownership has increased from 10% of the company in 1995 to 18% today, without buying a single additional share.
Amex is trading at 13.4 times trailing adjusted earnings. Its return on equity is very high at 34%. Reflecting the elevated ROE, its price to book value ratio is high at 4.2. The dividend yield is low at 1.5%, partly because the dividend payout amounts to only 21% of trailing earnings.
American Express is benefiting from the continuing switch to electronic payments. Management is forecasting adjusted earnings per share growth of 6-13% in 2019 and is optimistic about the long-term growth prospects.
This is a high quality, well-managed company trading at an attractive price.
