American Express (AXP 1.44%) recently reported earnings that beat expectations on both the top and bottom lines, but investors were disappointed that the company decided to suspend its massive buyback plan for the first half of 2018 as a result of tax reform.
However, I feel that this isn't a big deal from a long-term perspective, and that 2018 will be an excellent year for American Express. Here are four key things investors can expect from the credit card giant as the year gets underway.
Image source: Getty Images.
Expect the company to keep improving its high-end offerings
In 2017, American Express renewed its emphasis on its high-end credit card products. First, the company made enhancements to its flagship Platinum card, including $200 worth of Uber rides per year, which are clearly designed to attract younger, affluent customers. Then in November, American Express rolled out two new Hilton co-branded products to complement the two that already existed, including the $450-annual-fee Hilton Honors American Express Aspire Card.
Competition in the high end of the credit card market has become much more intense in recent years, with the rollout of products like the Chase Sapphire Reserve credit card. American Express seems set on maintaining its status as the high-end credit card leader, and I wouldn't be surprised to see more innovative upscale credit card products announced this year.
Expect tax reform to boost profits
When American Express announced its year-end 2017 earnings, the company reported a $2.6 billion one-time charge due to tax reform. However, it's important to emphasize that this was a one-time issue.
Over the long run, the new tax law will be a very good thing for American Express, as it will be for most other U.S. financial institutions. The company expects that its effective tax rate in 2018 will be 22%. For comparison, here's how Amex's effective tax rate has looked over the past two years:
|
Quarter |
Effective Tax Rate |
|---|---|
|
Q1 2016 |
35% |
|
Q2 2016 |
33% |
|
Q3 2016 |
34% |
|
Q4 2016 |
29% |
|
Q1 2017 |
32% |
|
Q2 2017 |
31% |
|
Q3 2017 |
26% |
|
Q4 2017 |
24% |
Data source: American Express. Fourth quarter effective tax rate excludes the one-time impact of tax reform.
The point is that while American Express' effective tax rate has varied considerably, it has generally been significantly higher than 22%. So, tax reform should translate into substantial tax savings in 2018.
Expect the buyback to come back in full force later in 2018
One of the most disappointing items in American Express' latest earnings report was the announcement that the company would suspend its buyback program for the first half of 2018 due to the tax reform charge.
While choosing to rebuild its capital is certainly a wise choice by management, it's easy to see why this was disappointing to shareholders. After all, buybacks are Amex's primary mechanism of returning capital to shareholders. In mid-2017, the company authorized $1.7 billion in share buybacks specifically for the first half of 2018.
However, when Amex receives the results of its 2018 capital plan later this year, I expect buybacks to remain a big part of it. In fact, since the company has been performing so well, I wouldn't be surprised if the buyback authorization is equal to or greater than the $4.4 billion one-year total authorized last year.
Expect 20% earnings growth
American Express' management seems to be quite optimistic as we enter 2018, as the company recently issued full-year earnings guidance in the range of $6.90 to $7.30. Even if we ignore the 2017 hit caused by tax reform, this would still represent a 20% year-over-year increase, based on the midpoint of this range.
So it's fair to say that management is confident that the combination of the lower corporate tax rate and the company's growing portfolio of products will translate into a major jump in profits this year.
