One of the most important factors when you're searching for stocks to hold forever is culture. Businesses with a terrible culture have a potentially unsustainable business model. Businesses with a thriving culture have employees who are happy to come to work and pour themselves into the job.
In The Motley Fool Investment Guide, Motley Fool CEO Tom Gardner provides some of the tools he uses to gauge a company's culture. Foremost among them are Fortune's annual "Best Companies to Work For" list and Glassdoor.com's "Best Places to Work." Let's take a look at the only two financial services companies to make both lists -- American Express (AXP -0.84%) and Capital One Financial (COF -1.95%) -- to decide whether the companies are a good buy now for long-term investors.
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Capital One Financial
Capital One is ranked 9th on the Fortune list and 88th on the Glassdoor list. The pandemic stressed all kinds of businesses last year, but having a strong culture that could nimbly respond to changing circumstances helped keep businesses going when trouble hit. According to Fortune, "Capital One, like other banks, implemented safety measures, but the firm also temporarily increased hourly wages, boosting pay by $10 an hour for branch and Capital One Café employees and adding $5 an hour for call center agents" during the pandemic.
On Glassdoor, the bank averaged a 4.2-star rating over more than 10,000 reviews. Capital One's CEO, Richard Fairbank, also ranked on Glassdoor's top CEOs list, coming in at 38th with a 95% approval rating. Fairbank owns over $500 million in Capital One stock, showing he's personally invested in the company's success and aligned with shareholders' interests.
The bank moved up 15 spots on the Fortune list compared to last year, and employees certainly seem to approve of the culture and management team. But how did it perform financially?
Capital One is known for its credit card business, which accounted for $17.6 billion of the company's $28.5 billion of gross revenue in 2020. Slowing consumer spending and uncertainty about potential loan losses hit the business hard in the first half of 2020, with total provisions for loan losses up $6.6 billion over that period. The company posted losses in the first two quarters and cut the dividend from $0.40 to $0.10 per quarter after the Federal Reserve limited dividend payouts.
Summer stimulus helped juice the credit card business over the second half of the year and, in the end, 2020 revenue was down just 5% from 2019. Pre-provision earnings for the full year actually ended up increasing 3% over 2019, and Capital One released $593 million from its loan loss account.
Fast forward to 2021, the stock is up close to 60% year to date, the dividend is back to $0.40, and the company has bought back $490 million (out of $7.5 billion authorized) of stock. Meanwhile, its price-to-earnings ratio is just over 15, and its price-to-book is 1.13 -- both right around the industry average, and a bargain price for a quality business with a thriving culture.
American Express
American Express came in at 10th on the Fortune list and 67th on the Glassdoor list (if these Glassdoor rankings seem low, remember Glassdoor's database contains thousands of companies). Fortune wrote that the company "made a commitment to not lay off a single employee owing to the pandemic in 2020 -- a pledge the company proudly says it upheld. AmEx provided workers impacted by COVID-19 with financial security at an uncertain time; it guaranteed full pay to those who couldn't work."
Out of 11,000 reviews, American Express's Glassdoor average rating is 4.3 stars. CEO Stephen Squeri has a 95% approval rating. He took the job just over three years ago, but he's been in the company's senior management team as vice chairman or group president since 2005. . Prior to the pandemic, AmEx was chugging along returns-wise with Squeri at the helm, and it has been in the top 25 of Fortune's list each year of his tenure, spending the last two years in the top 10.
American Express's business took the same sort of hit that Capital One's did over the first half of 2020. At the end of Q2, worldwide billed business was down 33% from 2019 and the company had increased loan loss reserves by $2.3 billion. AmEx's woes weren't fixed by a good summer, however. Total revenue for the year, net of interest expense, fell 19% from 2020, and net income of $3.14 billion plunged an even steeper 54%.
American Express took a bigger full-year hit than other credit card providers because it caters to a wealthier clientele focused on travel and entertainment. The most popular partners for AmEx cards are airlines and hotel companies. Additionally, American Express provides the financing for card users from its own balance sheet, rather than passing that risk on to partner banks, so it had to write down over $4 billion in 2020 in provisions for credit losses.
Despite the poor net income performance, American Express almost recovered to its peak pre-COVID stock price in 2020. It has since reached new highs amid $1 billion in reserve releases and an 11% increase in card member spending on things other than travel or entertainment in Q1.Management expects 2021 EPS to reach the goals it originally set for 2020, and for growth to take off from there.
The company now trades at a healthy forward P/E of 24.57 and a price-to-book ratio of 5.20. It isn't the same type of value stock that Capital One is, but investors should expect a more stable long-term recovery from the company.
