Many investors follow Berkshire Hathaway's (BRK.A -0.63%) (BRK.B -0.49%) $293.8 billion portfolio because those stocks were approved by Warren Buffett himself. Even though Buffett plans to step down as Berkshire's chief executive officer this year, his successor, Greg Abel, probably won't dramatically shake up those top holdings.
One of those top investments is American Express (AXP -0.29%), which accounts for 15.9% of Berkshire's portfolio and is the company's second largest holding after Apple (AAPL 0.04%). Buffett initially accumulated shares of American Express in 1964 through a partnership before his full takeover of Berkshire Hathaway in 1965, and he significantly increased Berkshire's position in the company in 1991. Today, Berkshire owns 21.6% of the entire company.
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Berkshire hasn't bought or sold any shares of American Express since 2012. Let's see why Buffett considered it to be such a reliable long-term investment -- and why it's a great place to park a fresh $1,000 investment, even as the market hovers near its all-time highs.
It's an exclusive club for higher-income consumers
American Express is often considered a credit card company like Visa (V -0.44%) and Mastercard (MA 0.05%), but it operates a completely different business model. Visa and Mastercard don't issue any cards or run their own banks. They only partner with banks and other financial institutions to issue co-branded cards and handle those accounts. Visa and Mastercard only generate revenue by charging merchants "swipe fees" for every transaction that runs through their card-processing networks.
American Express is both a card issuer and a bank. Since it needs to support its own cards with its own balance sheet, it only offers those cards to lower-risk, higher-income consumers. That exclusivity limits its growth, but it also reduces its credit risk and boosts its appeal as a status symbol. That's why Buffett said you "can't create another American Express" in a Bloomberg interview in late 2022, and why he repeatedly praised its wide competitive moat.
At the end of 2024, only 0.8% of American Express' consumer and small business loans were delinquent by more than 30 days, compared to a ratio of 1% at the end of 2023. It also only allocated 8% of its total revenue (net of interest expense) to its credit loss provisions in 2024.
It's well-insulated from inflation and interest rate swings
Since American Express is both a card issuer and a bank, it's better insulated from inflation and interest rate swings than Visa and Mastercard. Rising rates can reduce the swipe fees at all three companies as consumers curb spending. However, higher rates also boost the net interest income of American Express' banking segment by attracting more deposits and collecting higher interest payments on its loans. That balance makes it a good all-weather stock to hold, regardless of where interest rates go in the future.
Stable growth rates at a reasonable valuation
From 2014 to 2024, American Express' revenue (net of interest expense) and diluted earnings per share (EPS) grew at a compound annual growth rate (CAGR) of 7% and 10%, respectively. It also bought back nearly a third of its shares during the past 10 years, and it's paid continuous dividends for nearly five decades. It achieved that steady growth even as the pandemic, inflation, rising interest rates, geopolitical conflicts, and other macro headwinds rattled the global economy.
From 2024 to 2027, analysts expect its revenue and diluted EPS to grow at CAGRs of 8% and 12%, respectively. That growth should be driven by higher spending among affluent customers (especially for travel and leisure), the rollout of more travel-related perks, higher fee-based revenue from its premium cards, and its overseas expansion.
It's cheap relative to its growth potential
American Express' stock has already gained about 290% during the past decade, but it still looks like a bargain at 20 times next year's earnings. For reference, Visa and Mastercard trade at 28 times and 35 times next year's earnings, respectively. American Express won't ever be an exciting growth play, but it's a great stock to buy, hold, and forget.
