Buffett Favorite Soars In Bear Market

In fact, Buffett’s commitment to uncovering high-yielding businesses that return profits over the long run has made the Oracle of Omaha both a rich man and a household name.

Indeed, one of the firms Buffett identified early on has been making headlines recently, with its outstanding performance in the face of a challenging market environment surprising supporters and short-sellers alike.

That company, American Express, happens to be one of his longest-held positions – and meets the criteria of a classic Buffett stock perfectly. With its focus on premium customers and a fidelity to growth, AXP is a corporation that should be on the radar of any serious investor. It’s the fifth largest holding in Berkshire Hathaway’s portfolio, having first made an appearance in the 1960s.

But despite an uptick in stock market volatility and warnings of a possible recession amid escalating macroeconomic turbulence, AXP has maintained its position as a dominant player in the consumer finance industry.

But will this momentum continue forever? And, just as importantly, where is American Express headed today?

Q4: Young Customers Prove To Be An Unexpected Growth Driver

Following the release of impressive fourth-quarter results at the end of January, shares in American Express have soared more than 21% in 2023.

For example, the company’s revenue for the period increased 17% year-on-year to bring in a record $14.2 billion, while total network volumes also increased 12%.

However, although net income dipped 7% throughout 2022 – due to rising interest rates and a higher potential for defaults – this was compensated somewhat by AXP’s full-year sales, which increased 25% over the previous twelve months.

Interestingly, even though AmEx missed analyst estimates on revenue and profits for the quarter, investors appeared pleased with its guidance for 2023, as management expects 16% sales growth and $11.20 in earnings per share at the midpoint. In fact, according to its post-2024 growth plan, American Express believes it can accomplish EPS expansion in the mid-teens.

Moreover, the firm demonstrates exceptional skill at capitalizing on its younger base. Indeed, as Chairman and Chief Executive Officer Steve Squeri put it, American Express is increasing its “generational relevance,” not least among Gen Z and Millennial customers.

In fact, these cohorts are AXP’s most prominent growth drivers and, according to comments made during the firm’s latest conference call, represent more than 60% of AmEx’s proprietary credit card initiations for the most recent quarter and the full year.

What’s Different About American Express?

The company prides itself on having a unique customer base, one that is weighted toward higher-net-worth individuals with the ability to withstand recessions and keep spending during unusually high inflation.

Moreover, as Steve Squeri also notes, 70% of the company’s new cardholders have an American Express product with an annual subscription fee, which is vital for producing recurrent and predictable cash streams. This allows the business to plan its finances and budgetary measures effectively, which in turn facilitates the better allocation of resources and the execution of long-term investments.

On top of that, AXP is actively engaged in improving not just its consumer segment but also its business-to-business wing. Indeed, the firm is constructing an end-to-end B2B platform, which will streamline and automate most of its payment processes.

In fact, a big part of that ambition has already been realized with the acquisition of Nipendo. This builds on the launch of its digital payments ecosystem, Amex Business Link, and implies the seriousness and determination that American Express has for managing domestic and cross-border transactions while supporting card and non-card payments.

Has AXP Been Good To Shareholders?

AmEx just announced a staggering 15% increase to its quarterly dividend, taking it from $0.52 to $0.60 per share. While this increase gives it a modest forward yield of 1.16%, there are other factors that make AXP’s distribution especially attractive too.

To begin with, the dividend is remarkably safe. It currently sports a payout ratio of just 21%, while the company’s business operations are posting a staggering 31% return on common equity.

Furthermore, AXP boasts a 10-year compound annual dividend growth rate of 10%, which, when combined with 33 years of consecutive dividend payments, makes it almost irresistible.

But American Express offers more than just an income to its loyal stakeholders. For example, the company compensates investors with regular share buybacks as well. In fact, AXP has repurchased so much of its stock over the last decade that its total shares outstanding have decreased by 33%.

Why Did American Express Stock Go Up?

American Express has long been a powerhouse in the world of finance, and its impressive growth over the years is a testament to its robust business model.

Indeed, even in the face of stiff competition from other more agile and disruptive institutions, it has continued to grow its presence in the space. This is thanks partly to its willingness to court new markets and demographics and its commitment to staying at the forefront of the latest technology and product innovation.

Finally, American Express is a company that can generate consistent financial performance through a range of economic conditions. That’s what makes it a favorite of Warren Buffett’s – and why it could also be a great addition to your portfolio now.

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