Although higher interest rates typically blunt credit card spending, this stock gains from its focus on wealthier clients.
Higher card spending and a lower tax rate helped earnings per share jump by 37.8% in the latest quarter. The company also signed an exclusive alliance with one of the world’s major hotel chains. In the meantime, the stock trades at a modest 13.7 times future earnings.
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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, 2017, it had 112.8 million cards in use across 130 countries. That’s up 2.6% from a year earlier.
The company issues both traditional credit cards, which let users carry a balance, and charge cards, which have no pre-set spending limit but must have their balances paid in full each month. The U.S. contributes about two-thirds of Amex’s revenue.
Overall revenue rose 4.0%, from $32.9 billion in 2013 to $34.2 billion in 2014. The company lost its exclusive deal with Costco to Visa, which is why its revenue declined to $32.8 billion in 2015, and again in 2016 to $32.2 billion. Revenue rebounded 4.2% to $33.5 billion in 2017.
Earnings improved 9.8%, from $5.4 billion in 2013 to $5.9 billion in 2014. Due to fewer shares outstanding, per-share earnings gained 13.9%, from $4.88 to $5.56. Earnings then declined to $5.05 a share (or a total of $5.2 billion) in 2015, but recovered to $5.65 a share (or $5.4 billion) in 2016.
Recent changes to the U.S. tax code, which cut the corporate income tax rate from 35% to 21%, have hurt the value of Amex’s deferred tax credits (they let the company lower its future tax bill). In addition, the changes impose new taxes on the undistributed earnings of its non-U.S. subsidiaries.
As a result, Amex recorded a $2.4 billion charge in the fourth quarter of 2017. That charge cut its full-year earnings to $2.7 billion, or $2.97 a share. If you factor out that charge, Amex earned $5.87 a share in 2017. However, the company expects the U.S. tax reforms will cut its effective tax rate from 28.4% in 2017 to around 22% for 2018.
In the three months ended March 31, 2018, Amex’s revenue rose 11.6%, to $9.72 billion from $8.71 billion a year earlier. That beat the consensus forecast of $9.14 billion.
The gain is mainly due to a 10% rise in cardholder spending and more cards outstanding. The company also lowered the fee it charges merchants to process Amex card transactions. That helped increase the company’s overall fee income in the quarter by 9%. Amex has also cut jobs and other expenses. Those moves should lower its overall costs by $1 billion a year starting in 2018.
Meanwhile, the tax code changes cut Amex’s effective tax rate to 22% in the quarter from 32% a year earlier. As a result, its earnings jumped 30.6%, to $1.63 billion from $1.25 billion a year earlier. Due to fewer shares outstanding, earnings per share rose 37.8%, to $1.86 from $1.35. That beat the consensus estimate of $1.71.
Value Stocks: Cardholder spending due to accelerate thanks to deal with Hilton hotels
Amex raises funds for its card businesses through its banking subsidiaries, so rising interest rates will force it to pay more to depositors. Higher rates could also lead to less spending by cardholders as well as more loan writedowns. However, the company’s focus on wealthier clients helps keep its credit risk low.
In 2017, Amex wrote off 2.1% of its U.S. card loans, up slightly from 1.8% in 2016.
That modest increase is because the company has attracted new cardholders and encouraged more merchants to use its services. In 2017, average spending per cardholder rose 8.0% in the U.S. and 9.2% in other countries.
Cardholder spending should continue to rise in 2018. Amex recently formed a new 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.
Overall, the company will likely earn $7.13 a share in 2018. The stock trades at a moderate 13.7 times that estimate. American Express raised its dividend each year from 2010 to 2017. The $1.40 dividend currently yields 1.4%.
Recommendation in Wall Street Stock Forecaster: American Express is a buy.
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