Individual investors can boost their portfolio returns by following some of the most well-regarded investors. Warren Buffett, arguably the greatest to ever do it, gets a lot of attention thanks to his legendary track record.
If we take a closer look at Berkshire Hathaway's portfolio, we'll notice that one of its top holdings is American Express (AXP -2.05%). It's the third-largest position, worth $25.6 billion (as of July 31). Buffett first purchased Amex shares about 30 years ago, and it appears he remains bullish on the business.
But before investors rush to buy the company, here are three important things to know about the financial stock.
1. Amex is a closed-loop payments network
Investors are likely familiar with the two giant global card networks, Visa and Mastercard, that together processed a whopping $5.5 trillion in total payment volume (TPV) in their latest fiscal quarters. These companies, which are also in Berkshire's portfolio, allow cards from different banks -- like JPMorgan Chase, Bank of America, and Citigroup -- to utilize their networks.
Amex is unique in that while it is a card network like Visa and Mastercard, having handled TPV of $427 billion in the three-month period that ended June 30, it's also a card issuer. Only American Express cards, like the popular Platinum and Gold, can use the payments network, making it a closed-loop system.
The benefit is that Amex receives a greater portion of the transactions that run across its network. For example, merchants pay what's called discount revenue any time they accept payment from Amex customers. Cardholders pay annual fees to be members. And if these cardholders carry monthly balances, they also pay interest.
In the latest quarter, discount revenue jumped 8% year over year to total $8.5 billion, while revenue from card fees rose 21%. And thanks to rising interest rates, Amex reported net interest income in Q2 of $3.1 billion, up 32% year over year.
2. Amex has key competitive advantages
Buffett looks for businesses that have competitive advantages that create an economic moat, allowing these companies to defend themselves against rivals and produce financial outperformance for extended periods. Amex has two competitive advantages: network effects and a powerful brand.
Thanks to Amex's 138 million active cards, coupled with the tens of millions of merchant locations that accept these as a form of payment, the two-sided platform benefits from network effects. To hammer home this point, think about it from each side's perspective. Merchants have no choice but to accept Amex cardholders unless they want to lose out on a very affluent customer base. And customers want these cards in their pockets not only because of the numerous perks and rewards but because they are accepted all over.
Buffett loves companies that have strong brands, and Amex fits the bill. Again, the business has done a wonderful job attracting a higher-income consumer, and this premium status has certainly helped drive its success over time.
And according to Interbrand, American Express had the 27th-most-valuable brand in the world in 2022, pegging its worth at $22 billion. It was the second-strongest in the financial services sector, behind only JPMorgan Chase. However, Amex's brand value represented a much bigger chunk relative to its market cap.
3. Amex benefits from recent momentum
During the latest quarter, Amex saw revenue (net of interest expense) increase 12% to over $15 billion. And the company posted diluted earnings per share of $2.89. That bottom-line figure was not only also up 12%, but it was a quarterly record.
Key to these results was the travel and entertainment billed business which rose 14%. "We continue to see strong growth in travel and entertainment spending, which increased by double digits in the quarter and remain strong across customer categories and geographies," CEO Steve Squeri said on the Q2 2023 earnings call. Restaurant reservations on the Resy platform reached a record.
Again, because Amex customers lean more affluent, travel has proven to be a major tailwind behind its recent financial results. Its customers simply have greater discretionary income than the average American.
