Over the past six years, not only has the American Express Company (NYSE:AXP) hiked its dividend, but it has done so by fairly generous amounts. In 2016, American Express raised its dividend by a little more than 10%; in 2015, the company raised it by 11.5%. These healthy increases in dividend payouts have begun to put American Express on the radar of dividend growth investors, even with a yield that is still below the market average at just 1.5%.
Unfortunately for investors, American Express has faced its share of struggles the past couple of years. Since the beginning of 2015, the company's stock price has actually declined by 8%, while the S&P 500 has gained 18%. American Express's share price stagnation, coupled with its generous dividend hikes, has pushed the yield higher, making the stock more attractive to dividend growth investors. But with its recent business struggles, is the company's payout to shareholders safe? Let's take a closer look at what's ailing the company, what management is doing to right the ship, and how safe American Express's dividend really is.
The big AmExit
In 2015, American Express and Costco announced they would be parting ways after enjoying a long co-branded card relationship. A few months later, American Express lost another of its major co-branded card partnerships, JetBlue Airways, to Barclays and Mastercard.
Since the loss of these co-brand card deals, American Express's business has notably suffered. To show how steep the decline in business has been, in 2014's second quarter American Express reported $8.6 billion in total net revenues and $1.5 billion in net income. In 2017's second quarter, the company reported $8.3 billion in total revenues and $1.3 billion in net income. In other words, over the past three years the company's revenue and income have declined.
Indeed, the loss of these cards is so profound that American Express has resorted to reporting its quarterly earnings with two sets of numbers: its actual results and its results adjusted for the loss of its Costco portfolio. Yet when the numbers are adjusted for the loss of Costco, American Express's business can be seen in a whole new light. For instance, its year-over-year revenue growth this quarter was 1% but, once adjusted, showed a much healthier 8% growth rate.
|American Express Metrics||Q2 2017||Q2 2014||Change|
|Revenue||$8.3 billion||$8.6 billion||(3.5%)|
|Net income||$1.3 billion||$1.5 billion||(13.3%)|
|Return on equity||21.7%||28.8%||(710 bps)|
Can the company get back on the express lane to growth?
Since the loss of Costco, American Express management has taken what I believe to be proper steps to direct the company to top and bottom line growth. For starters, the company has placed a much greater emphasis on engaging its existing customers to borrow more. In the company's first quarter conference call transcript, provided by S&P Global, CFO Jeffrey Campbell stated:
As we have for several years now, we continue to grow U.S. loans faster than the industry, driven primarily by our success in growing loans from existing customers. During the first quarter, more than 50% of the growth in U.S. consumer loans came from existing customers, consistent with the trend we described at our Investor Day.
Besides driving loan growth, the focus on existing customers holds two major benefits for American Express. For starters, engaging existing customers requires less spending on marketing than the pursuit of new customers. Another benefit is that American Express understands the credit risk of its existing members much better than potential card holders outside of the AmEx universe. This means the company should be able to increase loan growth without sacrificing its best-in-class loan write-off rate of 1.8%. American Express has also increased user engagement by enhancing rewards for its card holders, ranging from increased airport lounge access to the introduction of new benefits like Uber credit.
So about that dividend...
Despite the company's troubles, dividend growth investors need not worry. The dividend is currently well-covered by the company's earnings. Halfway through the year, management is "confident" it will hit its full year 2017 EPS guidance of $5.60 to $5.80. Given the board's recommendation to increase the dividend this quarter by 9%, the company is slated to pay out $1.34 in dividends this year to investors. That means, using the midpoint of $5.70 for American Express's guidance, the company's payout ratio is only 23.5%! That leaves plenty of room for the company to repurchase shares, reinvest for growth, and raise dividends in the future as long as the company does not suffer a catastrophic decrease in earnings going forward.
Given that the company has already suffered from losing major customers and only suffered relatively minor revenue and earnings declines for a couple of years, I find that scenario highly unlikely. Much more probable is that the company's plan to return to top and bottom line growth shows some measure of success beginning as early as 2018. That means investors seeking income should see plenty of high single-digit and low double-digit dividend hikes in the years ahead.