Buffett Has Held This Phenomenal Stock for 30 Years

In 1991, Warren Buffett made a big splash by shelling out $300 million as part of his first purchase of American Express shares. Since then, he has held an iron clasp around his holdings, and continues to believe in the credit card firm’s prospects for the foreseeable future.

What is it that the Oracle saw back then which persists to this day that makes Amex so unique?

Amex Is Much More Than a Platinum Card

For Buffett to take such a big plunge on one stock back in the early 1990s, he had to believe the enterprise and business model would stand the test of time. But what exactly did he see?

For one, American Express is much more resistant to economic woes than most ordinary investors would assume at first glance. A cursory analysis would presume that as transactions in the economy declined, so too would American Express stock fall. 

But Amex has various revenue models that oscillate like a symphony no matter which way the economy is going. For example, when interest rates rise net income revenue soars as cardholders pay more in fees.

Often higher interest rates are accompanied by slowdowns economically so the lower transaction volume is offset by higher net interest income.

Amex also enjoys an underlying revenue stream that is independent of transactions. Annual fees contribute a substantial portion to the top line, and have been growing by around 20% YoY as cardholders favor paying more in exchange for getting more from perks and rewards.

In good times, management can allocate capital to marketing to goose the top line while in choppy times, they can pull back on spending to preserve profitability. During rocky periods, rewards utilization diminishes also, helping to offset the perks liability.

So, is Warren still a fan?

Does Warren Buffett Still Own American Express?

Yes, American Express remains the third largest holding in Buffett’s Berkshire Hathaway portfolio, representing 7.25%.

It’s no wonder he continues to favor the firm given its diverse revenue streams that extend to network services, merchant acquisition and processing, as well as travel-related services that buffer the income statement against market fluctuations.

So too has management proven to be exceptional in forging strategic partnerships with airlines, hotels and retailers through co-branded credit cards. These relationships are crucial to the development and integration of technologies, such as contactless transactions and mobile wallets. They also ensure the company has a deep and extensive array of reward options to engage cardholders and encourage spending.

Amex is best-known for its collaborations in the travel and hospitality sectors too, and that in turn ties into the company’s demographic target, which features a wealthier clientele who can afford to pay the yearly fee, as well as to fly and stay in hotels.

For Buffett, the laundry list of positives is a mile wide and includes the company’s expansion into emerging markets, resulting in both greater diversification of revenues as well as higher insulation from regional downturns.

Speaking of which, American Express has a proven track record of thriving during recessions where others have buckled under the pressure of recession and stock market crashes. It’s that resilience which attracts Buffett the most and exemplifies the firm’s wide moat characteristic.

With all that said, what does the future hold for American Express?

Is Amex a Buy?

Somewhat astonishingly for a firm with a $136 billion market capitalization, management forecasts top line growth of around 9.6% over the next half decade coupled with earnings growth that’s even higher.

That combination contributes to a discounted cash flow forecast target price of $211 per share, suggesting 12.4% upside potential.

A caveat to the bullishness is that the company is trading at 17.3x earnings and appears to be trading at a premium relative to near-term earnings growth. That fact has not escaped analysts who are more pessimistic and have placed a $177 per share target on the stock.

Another concern that likely has them erring on the side of caution is the slowdown in revenues in recent quarters that has declined from closer to 20% in Q1 of 2022 to 10.7% by Q3 2023.

Regardless of variation in near-term targets, American Express is forecast to deliver solid earnings over the long-term and that should contribute to a predictable dividend yield that currently pays out $2.40 per share, translating to a 1.4% yield. That fact alone will keep dividend investors sniffing around for income opportunities.

Wrap Up

Remarkably for its size, American Express is expected to grow at near double-digits over the next 5 years. That fact alone signals that, irrespective of whether the economy thrives or crashes, Amex has a business model so strong that it can withstand the turbulence. Its robust model is the result of a moat, otherwise known as a sustainable competitive advantage, and that’s why Buffett has favored it for so long.

The moat is evident in the firm’s return on invested capital, which sits at 11.3% and its return on common equity of 30.8%.

Because the company has so many levers to pull to keep revenues flowing from net interest income in bad times to transactions in good times, no matter which way the market turns, it is likely to outperform the broader market for the foreseeable future.

As long as it does, expect Buffett to continue holding it as part of his Berkshire Hathaway equity portfolio. At the moment, his Amex stake is his third largest, representing 151 million shares and $22 billion. He hasn’t changed his ownership position in a long time and is unlikely to do so anytime soon.

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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.