American Express (AXP)

Credit card company American Express was founded in Buffalo NY in 1850, starting out life as an express mail business. It initially built up a monopoly on the movement of goods, securities, and currencies throughout the state of New York, but quickly became a market leader in deliveries across the US. From there it was a logical step to leverage its power and system of national networks to move into financial services, to eventually become one of the biggest players globally.

This was initially in the form of money orders, and then traveller’s cheques which turned the company into a multinational by helping customers move money across countries and continents. But after Diners card launched the first iteration of what would become the modern credit card in 1950, it took only 8 years for Amex to move in on the action, launching a premium card option, and become the significant player that we know today.

According to Forbes magazine, American Express is the most recognised brand of all the financial services companies, ahead of all the big banks but most importantly beating out its fiercest rivals Visa and Mastercard. It’s this recognition as a premium brand that attracts a more affluent type of consumer to its product. Just the type of consumer that gives Amex a higher card spend than any other credit card, 3x card spend in fact.

This is important for American Express, as unlike its rivals it issues its own cards. This means it brings in more revenue the more the customer uses the card. A significant distinction between Mastercard and Visa who are forced to issue through third parties. Of course, Amex also brings in an income by charging cardholder fees, customer loans, and interest on outstanding credit card amounts, but the merchant fees are what sets it apart and help shield it from downturns in other revenue streams.

Because American Express makes 60% of its revenue from owning its own cards it is important that it continues to add new cardholders into the mix. During 2019 Amex issued 11.5 million new cards, creating a grand total of 112 million cardholders globally.  In recent years it has done a great job in attracting new customers by increasing its online presence and marketing to the increasingly affluent millennial segment. 81% of Amex clients now engage directly with digital payments, while 2019 saw a 26% increase in customers using its mobile app on a daily basis. This has been a direct result of attempting to attract the younger cardholder.

An attractive rewards programme is also crucial to Amex’s success. It helps entice new customers, particularly from the higher socio-demographics. This, in turn, attracts more merchants to accept Amex cards, which in turn attracts more customers. It’s an attractive cycle, which sees more cardholders attract more cardholders, and sees more money spent on Amex cards.

Amex has now experienced 10 straight quarters of double-digit growth, and its share price has more than doubled since the beginning of 2016. It pays out a consistent dividend of approximately 1.59 per annum and is continually buying back its own shares. Since 2000 it has decreased the total value of shares by around 40%. That means a higher share of the profit for shareholders. It’s almost as if the board thinks its shares are undervalued. And there’s a reason for that. They are.

The current price to earnings ratio of the S&P500 is sitting around 23.55 at the moment. While the finance sector as a whole sits around the 25.16 mark. Rivals Mastercard and Visa have p/e’s of 38.08 and 35.47 respectively. American Express currently has a p/e ratio of just 14.48. It’s well below the industry average, and no doubt is partly to do with the company’s aggressive buyback policy which returns value back to shareholders.

There are the usual risks of course. Being reliant on customer spend makes it vulnerable to a recession, and less spending equals less income. In Amex’s favour, however, is that it enjoys a much lower delinquency rate to other cards thanks to its well-heeled clientele. And in times of a recession consumers tend to rely more on credit, so where Amex lose on merchant income it will gain in interest payments. US Credit card debt hit an all-time high of $930 billion in the last quarter, a figure which will only rise during an economic downturn.

With the current market correction well underway, financial stocks have been hit hard. American Express is no different and is trading at more than a 15% discount to what it was just a few weeks ago. The coronavirus may be around for a few months yet, but the economy will go back to normal sooner or later, and Amex will be going strong for years to come. Now could be the perfect time to pick yourself up a solid stock at a great price.

The author does not hold an investment in the company mentioned and has not been renumerated for this report