Berkshire Hathaway has compounded investor capital at a nearly 20% annual rate for decades. That wonderful gain is about double the yearly pace of the broader S&P 500.
Such a fantastic track record unsurprisingly draws a lot of attention to what portfolio moves the Oracle of Omaha makes and what his conglomerate owns. The average investor can try to find new ideas.
One of Warren Buffett's top positions is in this unstoppable financial stock that has soared 123% in the past 15 months. Should you buy shares in this business with $1,000 right now?
American Express is a top-tier business
Berkshire Hathaway owns 21.5% of the outstanding shares of American Express (AXP 1.33%). This makes it the second largest holding for the Buffett-led company, behind only Apple. There must be a lot to like about the business.
American Express' powerful brand is a defining characteristic. Its premium credit cards have high annual fees, but they come with top-notch perks and rewards, not to mention the status they exude to other people. Naturally, Amex's positioning brings in an affluent base of customers that have robust spending power.
There's also a network effect at play here. The more American Express credit cards there are actively in use across the world, the more valuable it is for merchants, because the customer base expands. With more acceptance locations, cardholders have a growing list of places to spend. Essentially, the entire platform becomes more valuable as it gets larger.
The combination of Amex's brand and network effects creates a company that has a leading position in the payments space. In my opinion, there's a very low chance that the business will get disrupted anytime soon. It has staying power, something Buffett appreciates.
NYSE: AXP
Key Data Points
Strong spending activity
Last year revealed another impressive showing from American Express. Revenue (net of interest expense) jumped 9% compared to 2023, to $66 billion. In 2025, the leadership team expects the top line to grow 8% to 10%. There's a "long-term aspiration" of 10% yearly increases as well.
American Express directly benefits when there's strong spending activity, as it's able to collect more in interest on any balances cardholders maintain, while also generating revenue from merchants plugged into its network. At a high level, the business wants more commerce to happen.
In the fourth quarter, payment volume was up 8%, demonstrating an acceleration from prior quarters. Travel and entertainment spending rose 10%, more than goods and services. This reflects greater public interest in spending more money on experiences and less on material possessions. Amex is a beneficiary of this trend.
What's particularly encouraging is what's happening with younger consumers. Gen Z and millennial cardholders saw 16% volume growth, a much faster rate than Gen X and baby boomers.
It's also great to see that younger cohort driving lots of new card sign-ups, especially with the Platinum and Gold cards. Assuming these customers are still a long way from their peak earning years, there's a potentially sizable runway for Amex to benefit in the form of more spending that leads to more revenue.
Take a rain check
American Express is clearly a high-quality enterprise. This is demonstrated by the fact that its earnings per share have increased at an annualized clip of 11.9% in the past five years. It has been a steady climb.
And with durable competitive strengths, you might think the stock is a no-brainer buying opportunity with $1,000. But I don't see it that way.
As of this writing, shares trade at a price-to-earnings ratio of 22.8. This is close to the most expensive valuation in the last three years. The current setup is certainly not a bargain.
Keep following American Express, and be patient until there's a more attractive entry point to accumulate shares.
