The Dow Jones Industrial Average dipped into bear territory this week, which means a few things for investors. The weak market can hurt shareholders who are relying on these investments for income in the near future. It also provides opportunities for investors who don't need funds in the near term and can find great deals in the market.
The Dow in particular offers an array of top companies that are leaders in their industries and are likely to continue leading. Since Dow stocks tend to be well established and cash rich, they're also likely to pay dividends. American Express (AXP +4.09%) is one such Dow stock that should keep boosting its dividend for years to come.
Why is American Express' stock price down?
The uncertain economy has eroded investor confidence, weighing down the markets. Even companies that are growing under these pressured conditions, which if anything is a reason to be even more confident in them, have been experiencing stock price declines.
NYSE: AXP
Key Data Points
American Express has solidly rebounded from pandemic shutdowns and posted an impressive 31% year-over-year increase in revenue in the second quarter. It remained profitable even amid an increase in funds set aside to cover defaults. Although net income did decline in the second quarter, due to a 27% increase in provisions for losses versus last year, the company still reported a hefty $2 billion in net income.
Chief Executive Officer Stephen Squeri explained that early in the pandemic, when revenue and income were falling, management made the decision to step up customer service and offer perks that fit the moment. As business recovered, it moved into credit card refreshes and a focus on new card acquisitions, and this has resulted in record acquisitions for U.S. consumer platinum, gold, and Delta co-branded cards.
Over the past few years, American Express has pivoted to target a younger customer base, and it now has a loyal cadre of high-spending customers across various age groups. Squeri says the global premium customer base is "unrivaled in the industry."
More business means more dividends
The future looks bright. The continued focus on millennials and Gen Z customers lays the foundation for many more years of growth. This is the company's fastest-growing age cohort, making up 60% of new card acquisitions and about 75% of new U.S. gold and platinum cardholders. Not only do these members have excellent credit profiles, but they're highly engaged with cardmember benefits and they're outspending previous new cardmember groups, as well as other age groups.
American Express is also benefiting from tailwinds in the form of people getting back to their regularly lives after pandemic restrictions. The company's core spending categories are in travel and entertainment, which finally surpassed pre-pandemic numbers for the first time in April, and were at 108% of 2019 figures in the second quarter of 2022. American Express' more affluent customer base has the means to spend on these categories despite inflation and economic uncertainty, and they're taking advantage of open travel and experiences.
Fees remain an important element of American Express' business, giving the company an automatic revenue generator that remains constant under any circumstances. Net card fees were $1.5 billion in the second quarter, a 15% increase over last year. That's more than 11% of total revenue for the quarter.
Consistent dividend growth over many years
American Express has raised its dividend for many years, although it took a pause during the pandemic.
AXP Dividend data by YCharts
It raised the dividend in 2022 by 20%, a double increase to compensate for the missed year.
American Express is a top Warren Buffett holding, and it easily fits his usual criteria. It pays a dividend, has a strong moat in its unique cardmember fee platform, and the shares are cheap, trading at 14 times trailing-12-month earnings.
There are many reasons to be excited about American Express's growth opportunities and its ability to increase its dividend far off into the future.
