AMERICAN EXPRESS CO. $59 (New York symbol AXP, Conservative Growth Portfolio, Finance sector; Shares outstanding: 1.1 billion; Market cap: $64.9 billion; Price-to-sales ratio: 2.0; Dividend yield: 1.4%; TSINetwork Rating: Average; www. americanexpress.com) gets most of its revenue from the fees it charges merchants who accept its American Express charge and credit cards. Unlike Visa (see page 13), Amex is also a lender. As a result, it earns interest on its cardholders’ outstanding balances, and writes off bad loans. In addition, the company operates a travel business.
On average, the company’s cardholders spent 5.6% more in 2012 than in 2011. However, demand for Amex’s travel services is falling because businesses are conducting more meetings online.
In response to the drop in corporate travel, the company is restructuring its travel division, including cutting the number of travel agents it employs and making it easier for clients to book trips and hotels online. These moves will cut its workforce by 9% and cost $287 million (after tax).
Following a review, the company realized that it will have to set aside more funds to cover future redemptions of reward points earned by its U.S. cardholders. This will cost it $212 million. Moreover, under a deal with regulators, Amex will pay an extra $95 million to cardholders to settle disputes over reward points.
Excluding these unusual costs, Amex earned $5.1 billion in 2012. That’s up 3.6% from $4.9 billion in 2011. Due to fewer shares outstanding, earnings per share rose 7.6%, to $4.40 from $4.09. Revenue rose 5.4%, to $31.6 billion from $30.0 billion.
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. As a result, it wrote off just 2.1% of its loans in 2012, down from 2.9% in 2011.
The company’s earnings should rise to $4.76 a share in 2013. The stock trades at 12.4 times that forecast. The $0.80 dividend yields 1.4%.
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