American Express is a globally integrated payments company engaging in the processing and settling of card transactions. As a leading global services company, American Express operates an end-to-end, integrated payments platform known for its world-class brand and services.
The American Express brand has been consistently rated as one of the most valuable brands in the world, characterized by a large global footprint, a diversified customer base, and a differentiated business model.
American Express’s reportable operating segments are Global consumer services group, Global commercial services, and Global merchant and network services. In the last year, the company’s proprietary billed business was $1,071 billion and it had 70 million cards-in-force.
The bank’s principal products and services include charge and credit card products and travel-related services. Its business travel services are offered through American Express Global business travel JV. American Express’s network of distribution channels is large and integrated, consisting of third-party vendors, business partners, in-house sales teams, and applications and emails. The U.S. accounts for nearly 75% of American Express’s total revenues.
- Opportunity Score: 50
- Ticker: NYSE:AXP
- Sector: Financial Services
- Industry: Credit Services
- Market Cap: 123.19B
- P/E: 25.14
- Dividend Yield: 1.12%
- Payout Ratio (Earnings): 28.20%
- S&P Dividend Aristocrat: NO
- Chowder Score: Members Only
- Revenue Growth: Members Only
- Dividend Growth: Members Only
- Dividend Growth Fit: 6/10
- Dividend Income Fit: 5/10
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Revenue Growth & Market Exposure
With more than a century’s old existence, American Express has developed a highly trusted brand name and strategic partnerships with leading industry names like Amazon, PayPal, Delta Airlines, Marriott, Hilton, etc. American Express card is very popular amongst the merchant classes and is accepted at virtually all merchant locations in the U.S.
The bank is known for providing excellent customer services and differentiated products and services. It is highly diversified by customers, geographies, and business lines. More than 80% of American Express’ revenues come from discount revenue (the fees charged to merchants for using American Express cards) and fees. This makes the company less susceptible to interest rate fluctuations, unlike most of its peers. It also earns revenue on net interest income (~20% of revenue) like a conventional bank.
American Express is fortifying its digital footprint and mobile channels to enhance the customer experience as well as grow its customer base. In 2019, 81% of its active Card Members digitally engaged through the American Express mobile app/ website, increasing by 26% YoY.
American Express is a world leader in providing charge and credit cards to consumers, businesses, mid-sized companies as well as large corporations. The bank is gaining strength among small-sized businesses and also across international markets. American Express agreed to purchase Kabbage, a new-age fintech company that is targeted towards engaging small business customers.
American Express registered a 10% CAGR growth in revenues in the last five years. It is targeting growth by establishing new partnerships, launching new products and services, and introducing new digital capabilities around the world. It refreshed or launched over 50 proprietary products across both consumer and commercial businesses in the past two years. Q2 results were negatively impacted due to reduced spending by customers.
The travel and entertainment vertical was the worst hit. American Express extended its digital solutions for its commercial customers with the launch of American Express One AP. It also increased its contactless transaction thresholds in 60 countries around the world. American Express announced its contract renewal with British Airways and Marriott hotels. The CET 1 ratio stood at 13.6% at the quarter-end. It increased provisions for losses by $628 million to $1.6 billion during the quarter.
American Express is a Dividend Starter. It has raised its dividend for the last eight years in a row, though the company has been paying dividends for decades. The company raised its last dividend payout by 10%. Its payout ratio has been reasonable at 35% which provides enough room for future dividend growth and it sports an annual average yield of 1.6%.
American Express has compounded its dividend growth at more than 10% CAGR per annum, over the last five years. Its earnings have also grown at 7.5% CAGR during the same time. The bank’s strong capital and liquidity positions enabled it to return capital to shareholders through dividends. The company also has a share repurchase program in place and has returned $5.9 billion to its shareholders in the last year.
High-end credit card products and an affluent customer base further add visibility to cash flows, helping boost the credit quality and lowering the write-off rate. Its “spend-centric” business model incentivizes card members to spend on their cards which help accrue more cash flow for the company.
American Express is favorably placed to drive multiple income streams from existing customers. The rapidly changing payments landscape further offers multiple attractive opportunities for American Express owing to its rich heritage, strong reputation, and a large global presence.
American Express’s diverse businesses ranging from travel to cards to innovative digital products and services, reduce any earnings volatility. A trusted brand, a robust business model, and strong financial expertise are the company’s core strengths.
American Express competes in the global payments industry with charge and card networks, paper-based transactions as well as bank transfer models. The bank faces competition from financial institutions, national and international card networks, businesses issuing their own private label cards, and emerging players leveraging technology.
American Express competes with the likes of Discover Financial Services, Visa, and MasterCard. Visa is a global payments technology company providing electronic payment services to its clients, while MasterCard is a leading global payments company facilitating global electronic funds transactions, and Discover Financial Services is a direct banking and payment services company.
American Express is focusing on expanding its global merchant network. An affluent customer base further reduces loss provisions and are less likely to default on credit/ loans. Non-T&E spending has been recovering at a fast pace and its small business customers have remained resilient.
American Express is also diversifying its focus from a travel and entertainment benefit to the stay-at-home economy across categories such as grocery, food delivery, video streaming subscriptions, etc. The bank should benefit as economies open up and consumer spending resumes.