If you look at Berkshire Hathaway's gargantuan public equities portfolio, you'll quickly find that American Express (AXP 1.01%) is a top holding. The Oracle of Omaha's firm owns roughly 21% of the outstanding shares, and first started buying shares in the early '90s.
Clearly, the legendary Warren Buffett believes this top financial stock is worth a closer look. With that said, should you buy American Express for your portfolio? Let's consider some important factors.
Recent results
The economy continues to be characterized by uncertainty, particularly around the possibility of a recession. Despite this, American Express keeps posting strong results.
The business saw its revenue (net of interest expense) jump by 14% in 2023. Net income also rose double digits, albeit by 11%. Thanks to share buybacks, diluted earnings per share increased by 14%. Executives believe American Express will report double-digit top- and bottom-line gains in the current year.
Bringing on new customers is key to the company's success. American Express ended 2023 with 141 million active cards, up 6% from 12 months prior. Plus, payment volume of $434 billion in the fourth quarter represented a 5% increase from the year-ago period. More users and more spending activity result in greater fee revenue and interest income.
Bigger picture
It's not difficult to be optimistic about American Express over the long term. There are some factors that investors should know about.
The first is the rise of digital payments. This benefits all businesses exposed to credit cards, including other payment networks and banks. As cash and checks become less popular transaction mechanisms for more people, it provides a natural tailwind for American Express to expand its customer base and payment volume over time.
This business is also doing a wonderful job attracting younger customers. "These customers represent over 60% of the new consumer accounts we acquired globally in 2023," CEO Steve Squeri said on the Q4 2023 earnings call about Gen Z and millennial clients. These customers have greater lifetime value for Amex than signing up an older cardholder would.
The financial services sector is competitive, but American Express possesses an economic moat that should support its success for a long time. The company's brand is known as a premium service provider in the industry, allowing Amex to charge high annual fees for its cards, while also attracting higher-income consumers.
What's more, by operating the communications technology that connects merchants and customers, American Express also benefits from powerful network effects. This is an invaluable trait to have.
Winning stock
Companies that have strong fundamentals and an economic moat, like American Express, typically make for winning stock investments. This has certainly been the case here. Shares of Amex are up 104% in the last five years (as of April 3), a gain that far exceeds the rise of the broader S&P 500 index. Investors surely want this outperformance to continue in the years ahead.
It's important to consider the valuation. Amex stock trades at a forward price-to-earnings ratio of 17.8 right now. While this represents a huge premium to where shares traded just six months ago, I don't believe it means the stock is expensive. This is a high-quality enterprise that may warrant an even higher valuation multiple down the line.
Because it lends money, American Express is exposed to credit risk, which adds cyclicality to the mix. It also continues to face intense competition in the card industry. However, the business has proven itself over the years.
To be clear, no one should simply follow Buffett's moves and own a stock without thinking things through on their own. That's true in this instance. But once investors learn more about American Express, they will likely find many reasons to want to buy shares.
