In addition to the thumping that fintech stocks took starting in late 2021 and throughout 2022, the recent banking turmoil might cause investors to completely ignore any businesses with ties to the financial services industry. But being this closed-minded would be a flawed approach, as there are still some wonderful companies out there to look at that don't deserve to be quickly disregarded.
With that being said, a leading financial stock to consider buying right now is American Express (AXP -0.31%). Here's why this is a great business that even Warren Buffett's Berkshire Hathaway has owned for a long time.
Navigating an uncertain environment
While higher interest rates helped to boost net interest income 31% year over year in the fourth quarter, they came with a downside. American Express' card loan net write-off rate was 1.1%, up from 0.6% in Q4 2021. What's more, 1% of cardmember loan balances are over 30 days past due, up from 0.7% in the year-ago period. This has forced American Express to set aside $2.2 billion in provisions for credit losses in 2022, which is a direct hit to revenue.
It wasn't all bad news, however, as the company's total revenue (net of interest expense) of $52.9 billion in 2022 was up 25% compared to the prior year. Network payment volume of just under $1.6 trillion was 21% higher than the 2021 total. And the company's active card base increased 10% year over year to 133.3 million.
For the current year, management expects revenue to grow between 15% and 17%, with earnings per share rising about 13% at the midpoint. These would be healthy gains, for sure.
Benefiting from favorable attributes
Readers might be familiar with American Express' strategy of targeting an affluent audience. According to the company, its cardholders typically spend 3 times as much as non-American Express customers, a huge discrepancy. This could support the business during recessionary times because these consumers' higher net worths and greater discretionary income can lead to resilient spending behavior.
Moreover, a growing percentage of American Express' spending is coming from millennials and the Gen Z demographic. This could be a positive leading indicator for the company's long-term prospects as these younger consumers develop the ability to spend more with American Express as their incomes grow over time.
Another extremely positive characteristic about American Express is that it operates its own payments network, akin to Visa and Mastercard. As the platform that helps to process transactions that occur on its network, connecting its consumers directly with merchants, American Express benefits from higher spending due to inflation. And because its merchant base does not want to miss out on having American Express cardholders as customers, the company can charge higher payment processing fees. Called discount revenue, this segment's $30.7 billion last year (58% of company total) was up 25% year over year.
Surprisingly, only 19% of overall company revenue is derived from net interest income, reducing macroeconomic risk for American Express. Keeping credit exposure under control favors the business in uncertain times.
Rewarding shareholders
Over the past five years, American Express' share price has climbed 77% (as of this writing), easily outpacing the broader S&P 500 by a sizable margin. And the stock now trades at a price-to-earnings (P/E) ratio of 16, cheaper than the trailing five-year average of 20.
While American Express is selling at a discount to its past, it's not as straightforward of an analysis on a relative basis. The stock is way more expensive than a direct rival like Discover Financial Services, but this could be justified because of Discover's focus on less-affluent customers and its heavy reliance on interest income. And American Express is more expensive than traditional banks like JPMorgan Chase and Wells Fargo. On the other hand, the stock sports a P/E that is about half that of Visa's and Mastercard's. This could mean that American Express is fairly valued right now.
But to nudge investors into buying the stock, it's worth pointing out that the business pays a consistently increasing dividend. And the outstanding share count has shrunk by 34% over the past decade, with more repurchases likely to come. This indicates that there's a lot more to like about American Express than there are drawbacks. And investors would be wise to take a closer look at this top financial stock.
