Shareholders of American Express (NYSE:AXP) could be forgiven for not knowing what to expect from the company entering 2017. After all, it was coming out of a two-year period (from the beginning of 2015 to the end of 2016) where its stock price had declined by 20% while the S&P 500 had gained 9%. This fall from grace was punctuated by the company losing large co-branded card agreements like the one with Costco. Many were also questioning its ability to attract millennial cardholders.
Yet for all the questions the company had to answer entering the year, patient investors have been amply rewarded. American Express stock is up more than 33% year to date, crushing the S&P 500's 18% returns. While there are various factors that go into a turnaround like this, here's a closer look at three that have significantly contributed to the company's fortunes this year.
Time heals all wounds
When American Express lost Costco's business, it said goodbye to a sizable chunk of its consumer credit card portfolio. While the initial shock of the loss was bad enough, investors had to relive the bad news every three months during American Express' quarterly report. For a year, shareholders had to wearily digest both the actual earnings results and those adjusted for the loss of Costco. During the second-quarter conference call, the last quarter the company had to compare current results against previous-year figures that included Costco-related business, CFO Jeffrey Campbell recognized the frustration by saying, "I know we are all looking forward to next quarter on that front."
The Costco deal is now fully in the rearview mirror. And while nothing changed overnight to the business' fundamentals, it has to be acknowledged that it looks much better when the company can report, as it did last quarter, that total revenues really grew 9% year over year and net income 19% year over year -- no adjustments needed. American Express even raised guidance from a range of $5.60-$5.80 to $5.80-$5.90. With the loss of Costco finally resolved, American Express shareholders can finally enjoy more quarters that show real growth.
Treating its customers right
Investors who had been paying attention should not have been surprised when J.D. Power, the consumer advisory service, recently conducted a study of almost 23,000 credit card account holders to determine which credit cards had the most satisfied customers, and American Express took the top spot. The survey measured customer satisfaction by ranking six categories: interaction, credit card terms, billing and payment, rewards, benefits and services, and problem resolution. American Express was clearly ahead of the pack, too, as only one other credit card-issuing institution, Discover Financial Services (NYSE:DFS), scored five Power Circles, the highest possible score. American Express is consistently recognized for scoring high with its own customers: Earlier in the year, American Express was recognized in Brand Keys' Customer Loyalty Index, another independent third-party survey.
Besides keeping its customers in the fold -- a very worthy goal all by itself -- American Express is seeing solid loan growth from its existing cardholders. When the company reported its third-quarter results, total loans were $70.2 billion, a 14% increase year over year, and half of that loan growth came from existing customers.
At this year's Goldman Sachs U.S. Financial Services Conference, departing CEO Kenneth Chenault said that "... of the new loans that we're putting on, 50% of those loans are coming from existing customers. So that demonstrates that we're meeting the needs. ... [W]e have a very long runway and our focus is on meeting the needs principally of our existing customers." The incoming CEO and current vice chairman, Steve Squeri, also mentioned that one of the items at the "front and center" of his agenda was "building our premium lending portfolio through broader relationships with existing customers."
Achieving loan growth via satisfied and loyal customers can be an easy sell, and American Express has shown a consistent ability to do so.
Solving the credit card rewards riddle
Surveys show that American consumers consider rewards more important than ever when choosing a credit card. It's no wonder, then, that American Express' spending on card member rewards increased 21% to $1.9 billion in the third quarter. In the third-quarter conference call, Campbell said he believes the hike in spending is justified by the differentiated services American Express can offer its customers in a competitive environment. These differentiated services lead to higher engagement levels.
The rise in card reward spending has also been offset a bit by higher card fees. So far, American Express customers seem more than willing to pay for the company's rewards. At the Goldman Sachs conference, Chenault said:
The changes we made to our U.S. Platinum Card, were a prime example of pricing for value. At a time of intense competition in the premium segment, we increased the annual fee for this product by $100, while investing in value such as new airport lounges, up to $200 in credits when using new Uber and free gold card subcards ... since March the number of new platinum card members added to our franchise is up over 65% from our year-ago levels. And since September, when higher fees took effect for existing card members, our retention levels for these customers have remained stable.
The numbers seem to bear this out. While not rising as fast as card reward spending, net card fees did increase 5% to $786 million, helping to take the bite out of the higher reward spending. If the rewards lead to higher loan growth from existing customers and can be at least partially offset by increased customer engagement and higher card fees, the rise in expenses seems well worth it.
The bottom line is that the company has satisfied customers who are more engaged with its credit platforms than ever before. It's also returning to real growth after spending a year in the shadow of Costco's loss. While American Express might not repeat this year's monster performance in 2018, there are plenty of reasons for shareholders to be optimistic as the new year approaches. Right now, there is no reason to believe that the trends that led to its great year cannot continue in the immediate future.