Shares of integrated-payments network and credit card company American Express (AXP 6.22%) jumped earlier this year, following the company's strong fourth-quarter results and news that management was guiding for more impressive double-digit revenue growth in 2023. But a regional banking crisis and rising credit-crunch risks have spooked investors in financial stocks. Since American Express finances its own network of credit cards, it has more exposure to some of the financial risks associated with business and consumer debt than some of its credit card peers that outsource their financing.
But a closer look at American Express reveals good reasons to be bullish on the stock -- especially now that shares have retreated significantly from levels above $180 earlier this year. The company's premium clientele, prudent risk management, strong guidance, and robust dividend show that the stock's pullback may be driven more by fear than facts.
Revenue is soaring
If we're on the brink of a recession, you wouldn't know it by the company's first-quarter results. First-quarter revenue increased 22% year over year -- an acceleration from 17% growth in Q4. Further, management reiterated its full-year guidance for total 2023 revenue to increase 15% to 17% year over year.
A resilient customer
Investors should also keep in mind that the company's customer, on average, is wealthier than customers of other credit card companies. American Express management said in its 2022 Investor Day presentation that its card members spend an average of three times more per card than other networks and U.S. cardmembers boast 55% lower delinquency rates.
Therefore, not only does the company's premium customer base help it earn more per customer, but it reduces the risk of delinquencies during challenging macroeconomic periods.
"On credit, our metrics remain best-in-class, supported by the premium nature of our customer base, our strong risk management capabilities and the thoughtful underwriting actions we've taken on an ongoing basis," said American Express CEO Stephen Squeri in the company's first-quarter earnings release. "Our customers have been resilient thus far in the face of slower growth and higher inflation economic environment."
An exceptional dividend
Despite the company's strong financial performance lately, the stock will likely continue to be volatile. It's normal for investors to fret about the viability of liability-sensitive financial companies during challenging macroeconomic environments. A recession could lead to both lower spending and higher delinquencies -- a potential double whammy for the company. These negative factors could combine to be a major headwind for American Express.
But one thing that could help offset some of this potential turbulence is the company's strong dividend. The credit card company currently has a dividend yield of 1.6%. Better yet, this dividend is growing. It announced a 15% increase earlier this year.
In addition, American Express operates with a low payout ratio of just 16%. In other words, the company paid out only 16% of its trailing-12-month earnings in dividends. This leaves plenty of wiggle room for the current dividend, even if earnings take a hit. In addition, a low payout ratio means there's a lot of room for dividend growth.
Considering all of these factors, the stock's recent pullback looks like a good buying opportunity. With management guiding for double-digit revenue growth and the stock trading at just 16 times earnings, investors may want to seriously consider buying shares of this stock.
Management certainly seems to think shares are a good value. American Express Chief Financial Officer Jeffrey Campbell said in the company's first-quarter update that the company plans to continue to aggressively buy back its shares. In March, the board of directors authorized a share-repurchase program for up to 120 million shares.
