Is This Buffett Favorite A Sell?

Warren Buffett, a 91-year-old Omaha native, is one of the most successful investors in the world. As of March 2022, Buffett has a net worth of over $117 Billion. This makes him the sixth wealthiest person in the world, sitting behind the likes of Elon Musk, Jeff Bezos, Bernard Arnault, Bill Gates, and Larry Page.

Buffett acquired his wealth through years of strategic investments in fairly-priced, high-dividend paying blue-chip companies that feature strong balance sheets. Buffett’s top five holdings include:

• Apple,
• Bank of America,
• American Express,
• Coca-Cola, and
• Kraft Heinz. 

While these five stocks have helped Buffett become the sixth wealthiest person in the world, are these stocks past their prime, or will they be able to evolve with the changing dynamics of the world? For example, one of Buffett’s key holdings, American Express, is already challenged by new technologies and may soon fall out of favor among Millenials and Gen Z consumers. Yet American Express has a moat that has proven near impenetrable for competitors to overcome, so what does the future hold?

A Brief History of the American Express Company 

Founded in 1850, the American Express Company is a multinational corporation that specializes in payment card services.

The company was founded in Buffalo, New York, as an express mail business that shipped items across the country with horses and wagons.

The initial American Express was born out of a merger between the express companies owned by Henry Wells, William G. Fargo, and John Warren Butterfield. Henry Wells and William G. Fargo later broke away from Butterfield to form Wells Fargo & Company.

The American Express Company began trading on the New York Stock Exchange on May 18, 1977. During the company’s initial public offering (IPO) in May 1977, American Express stock began trading under the stock ticker AXP for $3.17 per share.

AXP stock has grown significantly since its IPO of $3.17 per share. As of March 2022, AXP is trading at around $190 per share. AXP’s 52-week low is $140.68 per share, and the stock’s 52-week high is $199.55 per share. AXP’s market cap is currently around $144.6 Billion.  

Since the company’s IPO, the stock has split four times. In 1983, there were two splits. The first was a 4-for-3 split, and the second was a 3-for-2 split. In 1987, another split, a 2-for-1, occurred. A fourth split came in 2000, which was a 3-for-1 split.

Therefore, if an investor had kept their initial 315 AXP shares acquired in 1977, they would have 3,780 shares of AXP today. An initial $1,000 into AXP would now be worth around $718,200 today. One famous investor who was able to actually capitalize on the growth of AXP was Warren Buffett.   

Warren Buffett Has Made Millions Through American Express 

Warren Buffett has held American Express for decades and has made billions in the process. Buffett initially acquired a stake in American Express in 1964 when the company desperately needed capital to expand its operations.

Buffett reportedly purchased 5% of the American Express company for around $20 million during the 1960s. Today, Buffett’s initial $20 million investment is worth billions. 

Buffett’s multinational conglomerate holding company, Berkshire Hathaway, currently holds 151.6 million shares of AXP. As of Q1 2022, Buffett’s AXP holdings are valued at around $24.8 Billion.

While AXP’s price per share reached an all-time during Q1 2022, the future of the American Express company may not be quite as bright. So, is now the time to sell one of Buffett’s favorite stocks and cash in on these all-time high share prices? Or will American Express go from strength to strength?

Are AXP’s Best Days Behind Them? 

The American Express company certainly has a rich history. AXP has proven itself as a high-dividend paying blue-chip company that features a strong balance sheet. However, while AXP has had a strong showing in Q1 2022, the company continues to show numerous signs of being past its glory days. The following three reasons serve as strong indications as to why AXP’s glory days are behind them. 

1. American Express Is Not Showing Enough Growth    

Since the 1960s, American Express has evolved into one of the most well-known and most profitable credit card brands in the world.

Unfortunately, the company’s key operating numbers have plummeted over the last decade. As a result, American Express has only been able to achieve low-single-digit growth recently, which will most likely equate to low-single-digit returns.

Eventually, lower returns will lead to American Express losing its status among many investors. 

2. American Express Continues to Exhibit Travel Industry Struggles 

Statistically, American Express credit card holders spend the most on travel and entertainment-related expenses. The pandemic has put a damper on travel since March 2020, which has, in turn, hindered business for American Express.

While uncertainty still surrounds the COVID-19 virus, lack of travel spending could affect the overall profitability of American Express significantly for years to come. 

3. American Express Is Not Evolving With the Times

Another key indicator that the future of American Express may be bleak is that the company is just not evolving with the demands of today. The buy now, pay later, or BNPL market is heating up. Younger generations like Millennials and Gen Z are using the BNPL market through companies like Affirm, Klarna, and Afterpay in favor of credit cards like American Express.

Experts report that the BNPL market will grow by over 22% by 2028. Overall, the growth of the buy now, pay later market will be a huge hit to American Express if the company is not able to pivot and evolve to attract the younger generation of consumers that will soon become the primary spending group as older generations continue to retire. 

Is American Express a Buy, Sell, or Hold?

While nothing is certain, if American Express can’t evolve with the times and attract the younger generation of Millennial and Gen Z, the company risks falling out of favor among investors.

American Express is definitely an American classic but there is a strong indication that it is past its prime.

Ultimately, this Buffett favorite is not a buy right now. Although AXP is at an all-time high when it comes to price per share, future returns from this level are unlikely compensate for the company’s long-term business risks.

From a valuation perspective, the upside is limited now also. The fair market value is around $197 per share which is within spitting distance of the current price, suggesting the stock is almost fully valued.

---

The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.