3 Reasons American Express Company’s Stock Could Rise

American Express has been on an impressive run through the years, and investors want to know if that's poised to continue.

Aug 29, 2014 at 8:54AM

The year 2013 was a truly incredible one for American Express (NYSE:AXP) and its shareholders. The company delivered a total return -- including dividends -- of nearly 60%, almost doubling the 32% return of the S&P 500.

AXP Total Return Price Chart

But things have come back down to earth in 2014, as the stock has dipped into the red through the first eight months, whereas the S&P 500 has continued its impressive run, gaining nearly 10%.

While American Express has still provided remarkable results, and is topping the return delivered by the S&P 500 since the beginning of 2013 -- roughly 60% versus 45% for the index -- the natural question becomes, will that gap continue to shrink? Or will American Express instead reverse the trend and continue its impressive historical run?

Although we don't know what the ultimate result will be -- no one can-- there are three distinct reasons to think the future of American Express could be bright, and its stock price will be on the rise.

1. Great broader industry trends
Since the depths of the financial crisis, one of the most fascinating things is the broader trends of the credit card industry. As the American Bankers Association has continued to show, while the average spending on credit cards has continued to rise during the last five years, the average balances have essentially remained flat:

Source: Q2 2014 American Bankers Association's Credit Card Market Monitor.

As you can see, this is most notable among those borrowers designated as "super-prime" -- the ones with the best credit scores. This is the exact target market of American Express.

But you may be asking yourself, because people are racking up an unchanged amount of debt on their credit cards, doesn't that bode poorly for American Express, because it won't be collecting additional interest income from the loans it issues? That's a great question; but, as it turns out, that actually isn't the case.

Amex By Images

Source: Flickr / Images of Money.

In 2013, just 15% of the total revenue at American Express came from net interest income, which is the interest it collects on loans. By comparison, the credit card business at Capital One (NYSE:COF) saw 77% of its revenue come from interest income. 

Because American Express offers a closed-loop network, it saw more than half -- $18.7 billion -- of the revenue it brought in last year come from discount revenue. As the company defines it, this is "fees generally charged to merchants when Card Members use their cards to purchase goods and services at merchants on our network." 

In fact, American Express notes that its capability as a closed-loop network, where its success is principally driven by what its customers spend on their cards -- and which it calls a "spend-centric business model" -- is one of its most essential competitive advantages. The broader reality -- that the highest quality customers are spending more and more on their cards each month -- will only be a good thing for American Express.

2. Continued share buybacks
While this isn't exactly fresh news -- I highlighted it in the coverage of earnings --  American Express also could see its stock rise as a result of the continued dedication of management to buy back stock. During the last three years, it has watched its shares outstanding drop by 12% and, as a result, while its net income has risen 15%, its earnings per share -- that which is actually available to shareholders -- has grown by 30%:

Source: S&P Capital IQ,

But one of the most striking examples of share buybacks is the massive stake Warren Buffett has in American Express through Berkshire Hathaway (NYSE:BRK-A)(NYSE:BRK-B). He hasn't added to his position in the company since 1998, when his ownership stake stood at 11%. Yet, thanks to the continual buybacks the company has made during the last 15 years, the ownership stake of Berkshire stood at 14.2% at the end of 2013. As a result, that increased ownership of American Express meant an additional $172 million of the $5.4 billion in income American Express earned in 2013 is technically available to Berkshire.

Of course, for individuals, those numbers will be markedly smaller; but it goes to show how much value a dedication to share buybacks can provide to investors.

3. Capable evolution into the new payments landscape
Much has been made about the evolution in the payments landscape. From newcomers like Apple, Amazon, and Facebook to old timers like American Express, it seems like a day does not go by without some report of evolution in the industry.

But, as a recent Fortune Magazine interview noted, no matter what changes occur, "Ken Chenault [CEO of AmEx] plans to insure that American Express remains in the center of every transaction."

Chenault went on to say:

We have the largest integrated global payments platform. We bring together users, card members, and merchants, and the data is incredibly valuable. We know where they spend online and offline. We want to deliver benefits and services when our card members want it, where, and how they want it.

Chenault wants us to see that, no matter how an individual pays for something -- whether it be a card or a phone or something altogether different -- American Express will be the preferred means for millions when the transaction is done.

We must remember all of these entrants from the technology landscape aren't threatening the business of American Express; they're just evolving how payments are made, not who they are with. As a result, AmEx is poised to continue its dominant position no matter how the industry shifts.

The Foolish bottom line
More work needs to be done before a definitive investment decision can be made; but the reality is, there's a lot to like about American Express. These three reasons are just scratching the surface when you consider why its stock could rise.

Your credit card may soon be completely worthless
The plastic in your wallet is about to go the way of the typewriter, the VCR, and the eight-track tape player. When it does, a handful of investors could stand to get very rich. You can join them -- but you must act now. An eye-opening new presentation reveals the full story on why your credit card is about to be worthless -- and highlights one little-known company sitting at the epicenter of an earth-shaking movement that could hand early investors the kind of profits we haven't seen since the dot-com days. Click here to watch this stunning video.

Patrick Morris owns shares of Amazon.com, Apple, and Berkshire Hathaway. The Motley Fool recommends Amazon.com, American Express, Apple, Berkshire Hathaway, and Facebook. The Motley Fool owns shares of Amazon.com, Apple, Berkshire Hathaway, Capital One Financial., and Facebook. 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information