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American Express Co. (NYSE: AXP): M&A and Dividend assessment

As American Express Company (NYSE:AXP) stock continues to rise in the wake of the Amex agreement with Wal-Mart Stores, Inc. (NYSE:WMT) on Bluebird, CapitalCube assesses potential corporate actions by American Express. Does it make sense for the company to increase dividends? Can AXP benefit from making acquisitions?

CapitalCube’s analysis is peer-based. American Express Company (NYSE:AXP) peer set comprises: JPMorgan Chase & Co. (NYSE:JPM), Visa Inc (NYSE:V), Citigroup Inc. (NYSE:C), Bank of America Corp (NYSE:BAC), Mastercard Inc (NYSE:MA), Capital One Financial Corp. (NYSE:COF), Discover Financial Services (NYSE:DFS), and Cielo S/A (CIEL3). For our Fundamental Analysis of AXP stock click here.

Corporate Actions

Dividend Action

While AXP-US has a medium quality dividend and a strong cash cushion, its relative operating performance is not strong enough to suggest an increase in the dividend.

Equity Action

The company’s current share price is not sufficiently lower than its 52-week high (currently about 5% below) and does not justify a share buyback as the best use of cash at this time.

M&A Action

While AXP-US’s size alone will not prevent it from becoming a target in this peer group, its share price could make it a relatively expensive acquisition.
AXP-US’s relatively small size (by book value) suggests that it would be tougher for it to be able to make meaningful acquisitions within this peer group.
Company numbers are TTM (trailing twelve months) or latest available. Share price data is previous day’s close unless otherwise stated.This report does not predict dividend or equity actions but highlights corporate actions that are supported by fundamental company performance and corporate finance principles.

Dividend Action

Dividend cut, increase or initiate?

In this section, we try to identify whether the company is likely to cut, increase or initiate a common stock dividend. In order to screen for these actions, we apply multiple tests to check whether the combination of operating performance, leverage, liquidity, growth expectations and share price performance is sufficient to permit such an action.
To check for a dividend increase at AXP-US, we look for outperformance relative to its peers in terms of pre-tax margin and operating cash flow. In addition, we also filter for relatively low leverage and good liquidity, which indicates sufficient support for debt servicing. We also look for a price to book value (P/B) that is positive, relatively low growth expectations (based on P/E) and a share price that has underperformed its peers. Overall, these conditions suggest that there is pressure on management to return money to the shareholders in the form of a dividend in order to increase their total returns. Finally, we overlay the dividend quality (medium or high) and ending cash dividend coverage (moderate or strong) to indicate whether the company is likely to increase its dividend.
American Express Co. (NYSE: AXP): M&A and Dividend assessment
To check for a dividend cut at AXP-US, we look for underperformance relative to its peers in terms of pre-tax margin and operating cash flow. In addition, we filter for interest coverage that is somewhat tight, which combined with a low dividend quality and a weak ending cash cushion would suggest that a dividend cut is likely .
American Express Co. (NYSE: AXP): M&A and Dividend assessment
Fundamentals do not support a change in dividend policy in the near-term.
The combination of AXP-US’s operating performance and interest coverage does not seem to justify a dividend cut. Further, while the company has a medium quality dividend and a strong cash cushion (a healthy 26.5x the cash dividend), its relative operating performance is not strong enough to suggest an increase in the dividend.
Likely Dividend Action based on Dividend Support from Operations or Pre Tax Margin % vs Free Cash Flow (% Revenue) charted with respect to Peers for American Express Co. (NYSE:AXP)

Share Buyback

Is the company likely to buy back shares?

In this section, we identify whether AXP-US is likely to buy back its shares. In order to screen for this event, we look for positive free cash flows and good liquidity in addition to a leverage, an earnings multiple and a current share price that are low enough to suggest that there is some pressure on management to buy back shares. If the company pays a dividend, we also confirm that its ending cash balance is more than the cash dividend in order to highlight the greater priority of paying a dividend versus buying back shares.
American Express Co. (NYSE: AXP): M&A and Dividend assessment
AXP-US’s share price performance does not justify a share buyback as the best use of cash.
AXP-US’s current share price is not sufficiently below its 52-week high (currently 4.7% lower) and does not justify a share buyback as the best use of cash at this time. As a reference, the company’s cash balance is currently 34.8% of its market capitalization.
Likely Share Buyback based on Management Pressure or P/E vs. % Below 52-week High Share Price charted with respect to Peers for American Express Co. (NYSE:AXP)

M&A Action

Why merge or acquire?

Companies typically acquire to realize economies of scale, scope, gain customers, bundle complementary products, or gain vertical integration. From an investor’s perspective, these business reasons fall into natural screening categories that include: (a) buying companies to boost growth expectations; (b) buying to realize cost synergies; and (c) buying earnings through acquisitions that increase EPS.
Potential targets would typically be smaller than their peers though sometimes targets can be marginally larger than the acquirer. As a result, when identifying a company as a target, we check for a book value that is up to 80% more than the peer median. In addition, we also filter for a cheap valuation relative to peers (i.e. price to book is less than the peer median) and a share price that is trading sufficiently (i.e. at least 20%) below its 52-week high.
American Express Co. (NYSE: AXP): M&A and Dividend assessment
Typically, acquirers are larger than their peers though, as mentioned above, targets can sometimes be marginally larger than the acquirer. To identify a company as an acquirer, we look for a book value that is around or more than the peer median and for growth expectations (measured by its price to earnings or P/E) that are lower than peer median. In addition, we consider whether the company has the capacity to add intangible assets (like goodwill) and whether its valuation (measured by its price to book or P/B) is attractive relative to its peers.
American Express Co. (NYSE: AXP): M&A and Dividend assessment
AXP-US’s share price could make it a relatively expensive acquisition in this peer group.
While AXP-US’s size (book value of USD19,267 million) alone will not prevent it from becoming a target in this peer group, its share price is not far from its 52-week high, which could make it a relatively expensive acquisition.

AXP-US has a relatively small book value and would find it hard to make meaningful acquisitions in this peer group.

At the same time, AXP-US’s relatively small size (by book value) within this peer group suggests that it would be tougher for it to be able to make meaningful acquisitions.

Company Profile

American Express Co. is a global payments and travel company. The company, through its subsidiaries, offers products and services including charge and credit payment card products and travel-related services to consumers and businesses around the world. It focuses on generating alternative sources of revenue on a global basis in areas such as online and mobile payments and fee-based services. The various products and services are sold globally to diverse customer groups, including consumers, small businesses, mid-sized companies and large corporations through various channels, including direct mail, online applications, targeted direct and third-party sales forces and direct response advertising. American Express operates through four reportable segments: U.S. Card Services, International Card Services, Global Commercial Services and Global Network & Merchant Services. The U.S. Card Services segment offers a wide range of card products and services to consumers and small businesses in the United States and provides travel services to card members and other customers. The International Card Services segment offers proprietary consumer and small business cards outside the United States. The Global Commercial Services segment provides expense management services to companies and organizations worldwide through its Global Corporate Payments and Global Business Travel businesses. Global Corporate Payments offers a range of expense management solutions to companies worldwide through its Corporate Card Programs and Business-to-Business Payment Solutions. Global Business Travel provides globally integrated solutions, both online and offline, as well as through mobile applications, to help organizations manage and optimize their travel investments and service their traveling employees. The Global Network & Merchant services segment operates a global payments network that processes and settles proprietary and non-proprietary card transactions. It also provides point-of-sale products, multi-channel marketing programs and capabilities, services and data, leveraging the global closed-loop network. The company was founded by Henry Wells, William G. Fargo and John Warren Butterfield on March 28, 1850 and is headquartered in New York, NY.

Disclaimer

The information presented in this report has been obtained from sources deemed to be reliable, but AnalytixInsight does not make any representation about the accuracy, completeness, or timeliness of this information. This report was produced by AnalytixInsight for informational purposes only and nothing contained herein should be construed as an offer to buy or sell or as a solicitation of an offer to buy or sell any security or derivative instrument. This report is current only as of the date that it was published and the opinions, estimates, ratings and other information may change without notice or publication. Past performance is no guarantee of future results. Prior to making an investment or other financial decision, please consult with your financial, legal and tax advisors. AnalytixInsight shall not be liable for any party’s use of this report. AnalytixInsight is not a broker-dealer and does not buy, sell, maintain a position, or make a market in any security referred to herein. One of the principal tenets for us at AnalytixInsight is that the best person to handle your finances is you. By your use of our services or by reading any of our reports, you’re agreeing that you bear responsibility for your own investment research and investment decisions. You also agree that AnalytixInsight, its directors, its employees, and its agents will not be liable for any investment decision made or action taken by you and others based on news, information, opinion, or any other material generated by us and/or published through our services. For a complete copy of our disclaimer, please visit our website www.analytixinsight.com.
This article was originally written by abha.dawesar, and posted on CapitalCube.
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