As one of the most accomplished investors ever, Warren Buffett has made some smart purchases over his multidecade career as CEO of Berkshire Hathaway (BRK.B -0.68%) (BRK.A -0.28%). The press and the pundits tend to focus on acquisitions like See's Candy, GEICO Insurance, and the large purchases of Coca-Cola and Apple stock. But there's one dynamite Buffett investment that has flown under the radar: American Express (AXP 0.07%). Berkshire Hathaway currently owns around 20% of the global credit card giant's stock at an estimated worth of $22.4 billion.
Here's why American Express has been such a great investment for Buffett and Berkshire Hathaway, and why the 151.6 million shares it owns could be worth much more 10 to 15 years from now.
Investing in American Express: a masterstroke that will pay off for decades
Buffett started buying American Express for Berkshire Hathaway in the early '90s. In his annual letter to shareholders this year, he stated that the company had essentially finished buying shares of the stock in 1995 at a cost basis of $1.3 billion.
Thirty or so years later, that stake is now worth $22.4 billion, a 17x increase in 30 years. And this doesn't include the $302 million in dividend income Berkshire now receives annually from American Express, a 23% annual yield compared to its initial purchase price. Management has consistently raised its annual dividend-per-share payout, up 160% in the last 10 years, meaning that Buffett's annual yield on American Express should only increase in future years.
AXP Dividend Per Share (TTM) data by YCharts
New management is growing the business again
The investment community was worried about the future of American Express in the early 2010s. After decades of growth fueled by a growing demographic of wealthy credit card users in the United States, the company was starting to lose market share to the more open Visa and Mastercard payment networks which had better merchant distribution and exposure to the fast-growing debit card category. The culmination of these worries came in 2015 when its longtime partner Costco Wholesale decided to switch its membership credit card to Visa.
To get the business back on track, American Express brought in a new management team in the 2017 to 2018 period. They had a few major priorities to get the business back to growth, but the foundation was to increase merchant distribution in the United States and key international markets in order to get American Express's value proposition in line with competitors. This is the core driver of the entire business: If customers can't pay with American Express cards at a retailer, they will be forced to choose Visa, Mastercard, or another payment option.
Five years later, the company has executed wonderfully with this strategy. Merchant distribution is now on par with Visa and Mastercard in the United States and a few key international markets, with other countries getting distribution investments this decade. This has led to a resurgence in active American Express users since 2018 (excluding a hiccup in 2020 during the pandemic), with active cards up to 133.3 million at the end of 2022 compared to 114 million in 2018.
More cards on the American Express network means more payment volume, which means more revenue for American Express. In 2022, revenue net of interest expense grew 25% year over year to $52.9 billion, with 15% to 17% growth expected for 2023 and 10%-plus annual revenue growth projected from 2024 onward.
With the majority of American Express's new cardholders coming from millennial and Gen Z consumers, these new customers should only grow their spending with American Express as they age into their top spending years (40 to 60 years old). As long as the company can steadily acquire more cardholders every year, it should be able to grow its earnings and dividend payouts for years (if not decades) to come.
Berkshire's stake will only increase (without buying more shares)
On top of steady growth and dividend income, Berkshire Hathaway's stake in American Express should climb higher over the next 10 to 20 years, even if it doesn't buy or sell a single share. How is this possible? Through the wondrous powers of share repurchases. American Express has taken its excess cash flow and consistently bought back its own stock from selling shareholders, reducing its shares outstanding by 32% over the last 10 years. Just by holding its existing shares, Berkshire Hathaway has seen its ownership stake in American Express grow to over 20%.
AXP Shares Outstanding data by YCharts
American Express plans to continue repurchasing stock. At its current rate, it could see its shares outstanding get cut in half 15 years from now. As long as Berkshire Hathaway doesn't sell any shares, that could turn its 151.6 million-share stake from 20% to 40% ownership of the business. If American Express continues to grow its annual earnings, the market will likely value the business at a higher number than its current $134 billion market cap.
Add earnings growth and share buybacks together, and I think Berkshire Hathaway's stake in American Express could be worth $60 billion to $80 billion 15 years from now, providing steady long-term value creation for its shareholders. Not bad for an initial $1.3 billion investment.
