American Express (AXP -0.62%) has a long-standing reputation associated with luxury and a high-quality customer base. The company has proven itself an excellent long-term performer but has faced some challenges this year, as economic headwinds weigh on the consumer finance industry. If you're buying American Express today, here are five things you need to know first.
1. American Express' luxury brand attracts a high-quality customer base
American Express operates the third-largest payment network, trailing only Visa and Mastercard. The company earns fees when it processes payments through its network. However, unlike its larger peers, American Express also holds credit card loans on its balance sheet, providing it with interest income.
Holding loans on its books exposes American Express to credit risk. To mitigate some of this risk, the company targets premium customers with its high-end credit card products, which is why consumers will pay $695 annually for the American Express Platinum card. The brand, often associated with exclusivity and luxury, is a considerable advantage that adds a ton of value to the company.
2. The stock is one of Warren Buffett's longest-held, largest holdings
American Express' premium brand is a big reason why it is one of the longest-held stocks in Berkshire Hathaway's portfolio. Warren Buffett believes strong brands create an economic moat for companies that can provide a long-term, sustainable competitive advantage.
"You can't create another American Express," Buffett told Bloomberg in an interview. "I could do all kinds of things with hundreds of billions of dollars, but I can't put in the minds of people what is in their minds about American Express." Its iconic brand is why American Express is Berkshire Hathaway's third-largest holding and has been a part of its portfolio for three decades.
3. Growth among younger demographics has been solid
A crucial part of any company's growth is attracting younger demographics who can become lifetime customers. American Express has done an excellent job attracting a younger customer base.
Last year, the credit card company added 12.5 new cards, with Millennial and Gen Z customers accounting for 60% of this growth. These younger customers are the fastest-growing portion of its card member base, with spending from this demographic up 18% year over year in the third quarter.
Image source: Getty Images.
4. A slowing economy could be a near-term headwind
One concern that has lingered over consumer finance companies is a looming recession. Experts have been predicting a recession for over a year, which has failed to materialize thus far.
However, there are signs that consumers are beginning to experience some stress as write-offs and past-due accounts inch up industrywide. Earlier this year, consumer debt topped $1 trillion for the first time, and delinquency rates on credit card loans have breached pre-pandemic levels from 2019. As a result, companies are building up provisions for credit losses in the event of further consumer stress.
5. Its credit quality is stellar compared with peers
One huge advantage for American Express is its premium customer base, which is why it has some of the best credit quality in the industry. American Express' net write-off rate on card member loans and receivables in the third quarter was 2%. This is well below the industry average, which was 3.38% in the second quarter, according to the Federal Reserve.
While an economic slowdown would certainly impact American Express, its premium customer base is better positioned to ride out any potential headwinds that could persist. That, and its cheap valuation, make American Express an excellent opportunity for long-term investors.
