Berkshire Hathaway is a huge conglomerate headed up by the great Warren Buffett. Although Berkshire has its hands in numerous industries, like insurance, energy, and railroads, individual investors care most about the companies held in its $371 billion public equities portfolio.
Look through the dozens of holdings and you'll see that American Express (AXP 1.00%) is the third-largest position in the portfolio. The credit card and banking giant has been a Buffett favorite for a long time, perhaps making it a so-called forever holding for him.
Berkshire owns 20.9% of this top financial company's shares outstanding today. But is now the right time to buy American Express for your own portfolio?
Why American Express is a safe holding
Buffett popularized the term "economic moat." This just means that a business possesses a trait (or combination of traits) that allows it to successfully fend off competitors for an extended period of time. In the Oracle of Omaha's mind, companies that have moats are very high quality, and they're a fertile hunting ground to find attractive investment opportunities.
American Express undoubtedly fits the bill here. For starters, the company has a powerful brand that is recognized around the world. American Express has a certain cachet among consumers, which helps attract a more affluent demographic. This leads to lower default rates than competitors, meaning less capital is set aside for potential losses.
And this premium brand image encourages consumers to pay high fees to be Amex card holders. This lets the business offer compelling perks and rewards. Merchants are also incentivized to pay higher processing fees to accept Amex cards because of these customers' ability to spend more per transaction.
American Express also benefits from the network effect. As the business attracts more card members, its merchants immediately have a larger target customer base. And with more merchant acceptance locations, card holders have more places to spend. It would be almost impossible for a new payment network to start from scratch and threaten Amex, given just how difficult it would be to bring on both consumers and merchants.
And what's unique about Amex is that it operates a closed-loop payments system. It issues cards and funds purchases, while also maintaining direct relationships with merchants. This allows the company to collect all the fees any time its cards are swiped.
All of these characteristics are certainly reasons why Buffett appreciates the business so much to make the stock a top holding. American Express can even be considered a safe holding because of its durability. Even with the rise of numerous fintech enterprises during the past decade, this business continues to dominate the card and payments landscape.
NYSE: AXP
Key Data Points
Strong fundamentals
Shares of American Express have climbed 24% in 2024 (as of March 21), beating the S&P 500 so far this year. The stock is now in record territory.
This shouldn't discourage prospective investors from buying the shares, though. At about 17 times forward earnings, the current valuation is reasonable, in my opinion.
The company is exhibiting strong momentum. Revenue (net of interest expense) and diluted earnings per share were both up 14% in 2023. Travel and entertainment spending remains a key driver for the business. Credit charge-off rates are below pre-pandemic levels. And American Express is seeing robust membership sign-ups among millennial and Gen Z consumers, with this group accounting for 60% of new customer accounts last year. Because of their younger age, this demographic has a higher lifetime value to Amex than other cohorts.
Investors won't find any shortage of reasons why American Express stock is a smart buy today.
