This major issuer of payment cards continues to expand its user base, revenue and earnings despite the end of an exclusive deal with a major retailer. It has also spent significantly on rewards and other incentives while establishing key international partnerships to further expand into new markets.
Meanwhile the stock trades at just 12.3 times the expected 2019 earnings, and the company has now resumed its share buyback program. That’s on top of its solid dividend.
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AMERICAN EXPRESS CO. (New York symbol AXP; www.americanexpress.com) is one of the world’s largest issuers of payment cards. As of December 31, 2018, it had 114.0 million cards in use across 130 countries. That’s up 1.1% from a year earlier.
Amex issues both traditional credit cards, which let users carry a balance and also charge cards, which have no pre-set spending limit, but must have their balances paid in full each month. The U.S. accounts for 65% of overall revenue.
The company’s revenue fell 4.0% in 2015, from $34.2 billion in 2014 to $32.8 billion. That’s because it lost the rights to issue Costco cards to Visa. Revenue fell again in 2016 to $32.2 billion.
In response to the loss of Costco, Amex has expanded its spending on rewards and other incentives. That has helped attract new cardholders and increased spending per user. As a result, the company’s revenue rose to $36.9 billion in 2017, and reached $40.3 billion in 2018.
Earnings fell 9.3%, from $5.9 billion in 2014 to $5.5 billion in 2015. However, due to fewer shares outstanding, per-share earnings declined 3.0%, from $5.56 to $5.39. Amex’s earnings again fell, to $5.4 billion (or $5.65 a share) in 2016, and to $5.3 billion (or $5.89) in 2017. Earnings rebounded in 2018 to $6.9 billion (or $7.91), partly due to a tax benefit.
In 2018, the company spent $17.9 billion on customer engagement, including rewards and special promotions. That’s up 14% from 2017. However, average spending per cardholder rose 4.4%, reflecting a 10.4% increase in the U.S. and a 2.6% rise in other countries. As well, Amex’s cardholders spend, on average, 3 to 4 times more per year than competing credit card clients.
Amex typically charges merchants that accept its credit and charge cards a swipe fee of roughly 5% of the transaction’s value. Those fees help fund its cardholder reward programs.
Amex’s fees are higher than the 2% charged by Visa, MasterCard and other credit card issuers. As a result, merchants would entice shoppers to use cash or lower-fee cards with special incentives and offers.
However, the U.S. Supreme Court ruled that the company’s “swipe fee” policy does not violate anti-trust laws in June 2018. So the court ruling prevents merchants from expressing a preference for non-Amex cards.
The company also passed the U.S. Federal Reserve’s latest “stress test.” It measures how such firms would cope with a jump in unemployment, falling stock prices and other unfavourable conditions.
Blue Chip Stocks: Replaced Costco with Amazon, LianLian and Hilton
Partnering with online giant Amazon.com, the company also aims to spur its growth with an initiative that targets small businesses. The deal gives those users special rewards for purchases made on Amazon. They can also get extra cash back, or no-interest payments on select purchases.
Amex’s focus on wealthier clients also continues to keep its credit risk low, particularly as rising interest rates could hurt cardholder spending and spur loan writedowns. In 2018, it wrote off 2.0% of its worldwide card loans, up slightly from 1.8% in 2017.
The company also stands to gain from its new 50/50 joint venture with Chinese financial services company LianLian. This venture makes Amex the only foreign card company that can process transactions in China’s local currency. The number of cardholders in China (including Amex’s cards) will probably rise from 6 billion in 2016 to 9 billion in 2020.
Amex also formed a multi-year alliance with Hilton Worldwide Holdings Inc. (New York symbol HLT). The firm operates over 5,000 hotels in 103 countries. The deal makes Amex the exclusive issuer of Hilton Honors co-branded credit cards in the U.S.
The company’s will likely earn between $7.85 and $8.35 a share in 2019. The stock trades at just 12.3 times the midpoint of that range. The $1.40 dividend yields 1.4%. Amex also recently resumed its share repurchase plan. It can now buy back up to 69.6 million of its shares, or 8% of the total outstanding. There are no time limits for those purchases.
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