AMERICAN EXPRESS CO. $56 (New York symbol AXP, Conservative Growth Portfolio, Finance sector; Shares outstanding: 1.1 billion; Market cap: $61.6 billion; Price-to-sales ratio: 1.9; Dividend yield: 1.4%; TSINetwork Rating: Average; www.americanexpress.com) is best known for its American Express charge and credit cards. It also sells travel-related services, such as hotel bookings, insurance and traveller’s cheques.

Amex gets most of its revenue from the fees it charges merchants who accept its cards. It also earns interest on the outstanding balances of its cardholders. Being a lender adds to its risk, particularly if cardholders fall behind on their payments and Amex has to write off these loans.

However, Amex clients tend to have above-average incomes and good credit histories. The company has also tightened its lending policies in the past few years.

Rebound from recession was swift

Amex’s revenue fell 11.4%, from $27.5 billion in 2007 to $24.3 billion in 2009, as consumers and businesses cut their credit card use during the financial crisis. However, revenue rebounded to $27.6 billion in 2010, and to $30.0 billion in 2011.

Earnings dropped 48.2%, from $4.1 billion in 2007 to $2.1 billion in 2009. Earnings per share fell at a faster rate of 55.2%, from $3.44 to $1.54, on fewer shares outstanding. However, earnings improved to $3.35 a share (or a total of $4.1 billion) in 2010, and rose to $4.09 a share (or $4.9 billion) in 2011.

In the three months ended June 30, 2012, Amex’s revenue rose 4.6%, to $8.0 billion from $7.6 billion a year earlier. Earnings rose 3.4%, to $1.33 billion from $1.30 billion. The company spent $1.7 billion on share buybacks during the quarter, and aims to repurchase $4.0 billion of its stock in 2012. Because of fewer shares outstanding, earnings per share rose 7.5%, to $1.15 from $1.07.

The number of cards in use rose 6.5% in the quarter, to 100.1 million from 94.0 million a year earlier. As well, average spending per card rose 4.8%.

Loan losses remain low

Amex set aside $461 million to cover bad loans in the latest quarter, up 29.1% from $357 million. However, the actual year-earlier figure turned out to be lower-than-normal because of improving credit conditions. Moreover, bad loans were just 1.3% of overall loans, down from 1.6%.

The company offers refunds or special rewards to attract new clients and encourage its cardholders to spend more. The cost of these rewards fell 9.4% in the quarter, to $1.5 billion (or 18.4% of revenue) from $1.6 billion (or 21.2% of revenue) a year ago. That’s largely because Amex is sharing more of these costs with merchants through exclusive partnerships.

Rock-solid dividend adds appeal

High U.S. unemployment and the slowing European economy could hurt consumer spending. Even so, Amex’s earnings should rise to $4.34 a share in 2012. The stock trades at 12.9 times that estimate. The company did not cut its dividend during the financial crisis and recently raised the quarterly payout by 11.1%. The new annual rate of $0.80 yields 1.4%.

American Express is a buy.