Investing in businesses that can cash in on long-term trends can be a financially rewarding strategy. Companies that fit that description often grow their revenue, profit, share price, and dividend over time.
Financial services giant American Express (AXP -0.62%) arguably fits the above profile and this Dow Jones Industrial Average component could be a smart buy for dividend growth investors.
A thriving business with strong growth prospects
AmEx's $127 billion market capitalization positions it as the third-largest payments processor by market value, behind Visa and Mastercard. The growth potential of financial services companies is largely buoyed by one megatrend: the global growth of e-commerce. As more people shop online on a more regular basis, the use of credit cards should increase.
AmEx's recent results are the benefits of this trend. In the first quarter, it reported 3.4 million new cards, and said account acquisitions for its U.S. consumer platinum and gold, U.S. business platinum, and Delta co-branded accounts reached record levels. AmEx's fastest-growing customer demographics were millennials and those in Gen Z, which demonstrates that the company's strategy of pursuing younger customers is working.
AmEx derives a significant portion of its revenue from the fees it charges to merchants when a customer uses its cards. The company's double-digit percentage growth in payment volume led to a 22% boost in revenue to a record $14.3 billion during the first quarter.
Global e-commerce sales are expected to rise from $5.2 trillion in 2021 to $8.1 trillion in 2026, and as AmEx works to gain younger, engaged cardholders, its future should be bright. Analysts anticipate that the company's diluted earnings per share will grow at an annualized rate of 15% over the next five years. That's just slightly ahead of the average forecast of 14.9% for the credit services industry.
Image source: Getty Images.
An affordable dividend obligation
At its the current share price, AmEx's dividend yields 1.4%, well below the Dow Jones' 2.2% average yield. But I think AmEx is more of a dividend growth play than it is an immediate income play. Management has boosted the quarterly dividend by 161% in the past 10 years.
AXP Dividend data by YCharts.
Robust dividend growth (like its most recent 15.4% hike announced in March) looks poised to continue. With its dividend payout ratio expected to be just under 21% in 2023, AmEx will have the capital necessary to invest in future growth opportunities, further strengthen its balance sheet, and still increase its distributions to shareholders.
The valuation is attractive
Shares of AmEx have gained 16% in the past 12 months, but they still offer a compelling value with a forward price-to-earnings ratio of 13.6, which is well below the credit services industry's average of 17. That's a bargain in my opinion and I believe the stock is a buy for dividend growth investors seeking rising income and capital appreciation.
