Should American Express Company (AXP) Be in Your Portfolio?

Page 1 of 2

Consumer spending took a hit when the recession took hold in 2007-2008. Since then, however, consumer spending in the United States has been making a slow but steady recovery:

source: St Louis Fed

At the same time, the estimated usage of cash is expected to decline.

What does this mean? It means we – the consumer – are swiping our cards again, and more often as time goes on! I suppose you might want to own a company to benefit from this macro-economic trend. You want to own a credit card company, but which one? Ladies and gentlemen, I present to you American Express Company (NYSE:AXP).

American Express Company (NYSE:AXP)Brand power is the strongest kind

The first and foremost strength of American Express Company (NYSE:AXP) is the established brand power it possesses. American Express is ranked by numerous business magazines and surveys as one of the world’s most valuable and respected brands. It is also ranked at the top in customer satisfaction according to J.D. Power & Associates. You can ask any customer about their Amex Card, and you will likely have to hear them gush about the rewards system, customer service, and “warm feeling” when using their Amex.

Being picky can offer protection

Credit card companies are at risk of default when doing business. When a customer doesn’t pay the credit card bill, that company takes a loss on that customer. American Express Company (NYSE:AXP) helps to hedge against that risk in the segment of the market it goes after. American Express requires a higher credit score than the competition in order to qualify for its credit cards. It also tends to market towards the higher end consumer with more disposable income. This strategy helps limit losses due to customer default.

Oracle backed

American Express Company (NYSE:AXP) is a favorite of famous investor Warren Buffett. Buffett’ Berkshire Hathaway Inc. (NYSE:BRK.A) currently owns about 13% of the company, making it the company’s 4th largest holding. While everyone should do their own due diligence when investing, it is an added bonus to be backed by the Oracle of Omaha.

On a roll

With the economy starting to rebound, it is encouraging that American Express Company (NYSE:AXP) had a strong 2013 Q1 and holds a positive outlook. Sifting through the Q1 report will highlight:

  • Diluted EPS increase of 7% from this quarter last year.
  • Card member spending growth of 6%.
  • $3.2 billion in share buy backs during remainder of 2013.
  • 15% dividend increase.
  • Company-wide credit indicators remain at a high level.
  • Continued customer loyalty through growth in card membership fees.

American Express Company (NYSE:AXP) also remains focused on controlling expenses through aggressive cost control structuring to keep the balance sheet in order.

The competition

Capital One Financial Corp. (NYSE:COF) is one of the main competitors American Express faces. Capital One Financial Corp. (NYSE:COF) also stacks up well with American Express. Its debt/equity ratio of 0.9 is a bit lower than that of American Express. It also pays a higher dividend. Not only that, but Capital One is currently trading at a price to cash flow ratio of 7.2x vs 15.4x for American Express.

Capital One Financial Corp. (NYSE:COF) doesn’t target customers with quite as high credit score. This leads to a slightly higher delinquency rate than that of American Express. Capital One offers very strong competition for American Express, and due to current valuations of each – may actually be a better value in the short term.

Page 1 of 2