Since the beginning of the year, American Express (NYSE:AXP) has gained more than 19%. Recently, the company announced that it would raise its quarterly dividend by 15% to $0.23 per share. Even with the dividend increase, the forward dividend yield seems to be low, at only 1.34%. Should investors buy American Express Company (NYSE:AXP) at its current price after the dividend increase? Let’s find out.
American Express – The third biggest global player
American Express Company (NYSE:AXP) is a leading global services company, providing charge and credit payment card products and travel-related services to customers worldwide. The business operates in four main segments: U.S. Card Services (USCS), International Card Services (ICS), Global Commercial Services (GCS), and Global Network & Merchant Services (GNMS).
Most of its revenue, nearly $16 billion, or 50.7% of total 2012 revenue, was generated from the USCS segment. The ICS segment ranked second with $5.3 billion, while GCS and the GNMS contributed $4.75 billion and $5.27 billion, respectively, in 2012 revenue.
American Express Company (NYSE:AXP) is the third biggest player in terms of total payment volume and number of total cards issued, behind Visa Inc (NYSE:V) and Mastercard Inc (NYSE:MA). While American Express issued 97 million cards with a total payment volume of as much as $808 billion, the total payment volume of MasterCard was $2.43 trillion with more than 1 billion cards issued. Visa is still the global leader with $3.77 trillion in total payment volume and 2.1 billion cards issued in fiscal 2012.
However, investors should notice that the business model of American Express Company (NYSE:AXP) is quite different from the business model of both Visa Inc (NYSE:V) and Mastercard Inc (NYSE:MA). While American Express also acts as a financial provider for its users, Visa and Mastercard Inc (NYSE:MA) act only as the intermediaries between banks, merchants, and card users.
Visa Inc (NYSE:V) and MasterCard do not directly provide loans to customers., they generated revenue only from transaction fees. Thus, investors do not have to worry about credit risk for both Visa and Mastercard Inc (NYSE:MA). American Express, with consumers’ loans, is exposed to credit risks.
In addition to the dividend increase, American Express Company (NYSE:AXP) plans to buy back up $3.2 billion during the last three quarters of 2013, and an additional $1 billion repurchase in the first quarter of 2014. Thus, in the next four quarters, American Express shareholders’ would receive an additional buyback yield of 5.6% on its current trading price.
In the first quarter 2013, after delivering a sweet 26% growth in profit, Visa Inc (NYSE:V) announced a repurchase plan of $1.75 billion. Visa also declared a quarterly dividend of $0.33 per share payable. Visa is trading at $168.50 per share, with a total market cap of $111.4 billion. Visa’s dividend yield is quite small, at only 0.78%. A $1.75 billion share buyback would create an additional yield of only 1.57%.