Warren Buffett Loves This Stock

Warren Buffett of Berkshire Hathaway has a nearly $15-billion stake in American Express. And why he still holds onto it will surprise you.

Jul 13, 2014 at 10:37AM

Warren Buffett and the stocks Berkshire Hathaway owns almost defines the billionaire. But it turns out that there's one little-discussed reason why it owns 14.2% of American Express (NYSE:AXP).

Amex By Daveonflickr

Source: Flickr / DaveOnFlickr.

The hidden investment gem
Buffett is well known for his remarkably powerful and profitable buy-and-hold strategy. After all, he last bought shares of American Express more than 15 years ago in 1998, which is why the $1.3 billion investment in American Express by Berkshire Hathaway is now worth more than $14.5 billion. Talk about remarkable returns.

Yet, one of the fascinating things about American Express that Buffett often mentions, but rarely is considered, is the power of its name, or brand: American Express.

In 2007, Buffett said the "powerful worldwide brand" of American Express was one of the things that are "essential for sustained success," and helped protect the business itself.

Buffett

And "powerful" may be an understatement of the true value of American Express's brand. Consider when consultancy Interbrand released its latest Best Global Brands ranking, and it found the brand value of American Express grew by 12% last year to stand at a staggering $17.6 billion, making it the 23rd most-valuable brand on the planet. 

Its next closest competitor in the financial-services industry was bank HSBC, with a value of $12.2 billion. It would have to grow by nearly 50% in order to match American Express.

While it should come as no surprise, another well-known Buffett investment Coca-Cola -- which is also a brand he often praises -- is the third most-valuable brand in the world, as its brand value alone eclipses $79 billion.

The power of the brand
Deloitte, a consultancy, recently released a fascinating article about the commoditization of the banking industry. It began by noting:

With similar product features, pricing structure and promotional offers, basic banking products exhibit characteristics of a commoditized product, i.e., customers do not see much difference between a product offered by Brand X or Y. As such, customers are unlikely to have preferences for any specific brand.

As a result of the technology advances that are pushing customers out of banks themselves, the industry is becoming more commoditized every day, and banks are having an even more difficult time differentiating themselves from competitors. Deloitte argued that banks need to do a better job of ensuring customers are satisfied, and efforts must be made to guarantee -- even in the impersonal technology landscape -- more connections are made with customers.

Yet, one of the most noteworthy revelations from the study was its admission that American Express was "a positive example" in the financial landscape as it "has continuously invested in meaningful social and digital experiences." It went on to add:

For its digital wallet, American Express Serve, AmEx went beyond the traditional tools and entered into several partnerships -- with technology firms, carriers and payment companies -- to provide personalized consumer experience, offerings and deals based on their interests, past usage and spending habits.

American Express is not just an example of a firm that has a powerful brand; but it's also one that is both working and succeeding at growing the value of it.

Amex By Images

Source: Flickr / Images_of_Money.

The key takeaway
Does this mean we should dive in and buy American Express? Not necessarily, because Buffett himself has said, "A business with terrific economics can be a bad investment if the price paid is excessive."

More work needs to be done to determine the true value relative to the price of AmEx; but, undeniably, one incredibly valuable piece of American Express is the name itself.

Warren Buffett: This new technology is a "real threat"
People have speculated that American Express could face challenges from big technology companies, but Berkshire Hathaway has something even bigger to be worried about. You see, at the recent Berkshire Hathaway annual meeting, Warren Buffett admitted this emerging technology is threatening his biggest cash cow. While Buffett shakes in his billionaire boots, only a few investors are embracing this new market, which experts say will be worth more than $2 trillion. Find out how you can cash in on this technology before the crowd catches on, by jumping onto one company that could get you the biggest piece of the action. Click here to access a FREE investor alert on the company we're calling the "brains behind" the technology.

Patrick Morris owns shares of Berkshire Hathaway. The Motley Fool recommends American Express and Berkshire Hathaway. The Motley Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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