Warren Buffett loves to invest in storied American brands. Many investors know of his market-crushing investments in Apple and Coca-Cola, which have generated tens of billions in returns for Berkshire Hathaway. But he has another less-covered investment through Berkshire that has generated even better returns than Coca-Cola.
American Express (AXP -0.62%), the credit card giant, has posted phenomenal returns since Buffett (through Berkshire) bought shares in 1991, and it is now one of the conglomerate's largest stock positions, worth over $20 billion. It has posted a total return of 6,400% since 1991, more than triple the returns of Coca-Cola over the same time period.
Despite some hiccups around 10 years ago, American Express has crushed the market for years. Will this trend continue in 2024? Let's take a look.
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Expanding customer base, still a premium brand
While American Express does charge users an annual fee for access to its credit cards (and the perks they offer), it makes most of its money on credit card transaction revenue. This is the small fee a merchant pays American Express for processing a customer's payment. Last year customers spent close to $1.5 trillion on the American Express card network, leading to $33.4 billion in transaction revenue, or 55% of American Express's consolidated revenue.
It grows transaction volume by consistently acquiring new customers to sign up for its various credit cards. Last quarter it activated 2.9 million new cards, and has added around 3 million new cards to the American Express network each quarter since the beginning of 2022. Importantly, a lot of this growth is coming from younger millennial and Gen Z customers. Transaction revenue from these two age groups grew 15% year over year in the fourth quarter of 2023.
There are a lot of competitors issuing credit cards, including all of the big banks. American Express has been able to defend its position thanks to the premium features it can offer its millions of customers. These include things like access to airport lounges, other travel benefits, and generally high levels of customer service and rewards. With brand recognition that's been growing for decades in the United States, it would be tough for any competitor to dethrone American Express in the minds of many consumers.
Growing international distribution
A negative to American Express's business 10 years ago was the lack of distribution vs. payment network competitors Visa and Mastercard. In 2014, it only had an 80% merchant acceptance rate in the United States. Today, that acceptance rate has grown to 99% and is comparable with the leading card networks, which improves the customer value proposition. It is a key reason why American Express has been able to grow its transaction revenue over the last decade. If your cards are accepted at more locations, more people will use them for spending. It's that simple.
Management now wants to take this playbook global. It is focusing on 48 big cities with a lot of spending from wealthier customers (think London, Singapore, etc.). In 2021, 17 of these priority cities had an acceptance rate from merchants greater than 75%. This year management is hoping to double this number.
Growing international acceptance not only helps American Express grow spending from Americans traveling abroad, but can help them acquire customers from new markets such as the United Kingdom, Australia, and Japan. This is an important development for American Express, and it will be the key factor in whether it can keep growing spending on its network over the next five to 10 years given how big it already is in the United States.
The stock just hit all-time highs but is still cheap
After reporting more strong earnings, American Express' stock price shot up to $202, an all-time high. It is up 7.5% this year, handily beating the returns of the S&P 500. But don't let this dissuade you from buying the stock -- it still trades at a cheap valuation.
In 2024, management is guiding for earnings per share (EPS) of around $13, which gives the stock a forward price-to-earnings ratio (P/E) of 15.5. This P/E is still well below the S&P 500 average of 26.
And American Express should be able to grow its earnings much quicker than the average stock. With steady revenue growth, margin expansion, and consistent share repurchases, management has a goal of growing EPS at a mid-teens rate each year. Combined with a low P/E, American Express has a good chance of beating the market in 2024 as well as over the next decade.
