Will American Express Hike Its Dividend?

Stress-test results have been saturating the media this week as the big banks show off their hearty capital reserves and ability to withstand an economic pseudo-armageddon. Though this was the third annual test, the Fed added some of Dodd-Frank's regulations into the mix, prompting the announcement of the first phase, the stress test, on March 7 -- to be followed by the Comprehensive Capital Analysis and Review results this Thursday.

Although banks -- particularly big banks -- have been the focus of media attention, any entity considered a bank holding company is subject to this yearly scrutiny. Two institutions that fit this description are Capital One Financial (NYSE: COF  ) and American Express (NYSE: AXP  ) , though both are often thought of as primarily credit card issuers. Both of these companies passed the recent stress test easily, though American Express bested Capital One's 7.4% projected minimum Tier 1 common ratio with an 11.1% post-severely adverse-scenario capital cushion.

Source: Dodd-Frank Act Stress Test 2013: Supervisory Stress Test Methodology and Results.

Should American Express ask for a dividend increase or share buyback?
With such an impressive showing on the stress test, it seems almost certain that American Express will request -- and will be allowed to bestow -- a larger dividend, as well as institute a share buyback program. Indeed, only the two large custody banks, Bank of New York Mellon (NYSE: BNY  ) and State Street (NYSE: STT  ) had higher common ratios than American Express. Considering that big regional bank BB&T (NYSE: BBT  ) , which analysts had pegged as one of the more highly capitalized institutions, scored a 9.4% ratio, AmEx's results are all the more impressive.

Following the stress test last year, AmEx embarked upon a share repurchase program to the tune of $4 billion in 2012, reserving another $1 billion in buybacks for the current quarter. The company also announced a boost in the quarterly dividend to $0.20 from $0.18 per share.

How much will AmEx share with investors?
Will American Express be a little more generous this year? It certainly seems like it could afford to be. The company has many irons in the fire, and has recently begun exploring the social media side of credit card purchasing through a new deal with Twitter. As Fool analyst Dan Caplinger has noted, the company could easily bump up that payout quite a bit without feeling a pinch.

Certainly, with such a stellar financial checkup under its belt, AmEx could afford to be magnanimous with its investors -- provided it stays under the Fed's comfort level of less than 30% of estimated after-tax net income. Soon, we'll know just how benevolent they plan to be.

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  • Report this Comment On April 15, 2014, at 3:13 PM, mikewatson021 wrote:

    Glenn believes that the strength of the American Express brand coupled with the added investment in capital will likely unlock value in the company’s troubled business travel division, and will help the company maintain its superior position as a premier travel service provider. http://goo.gl/ZTUsmD

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