American Express' (AXP +1.01%) stock has rallied nearly 550% over the past ten years. If we include reinvested dividends, it delivered a total return of 644% -- easily beating the S&P 500's total return of 330%. Will a fresh investment in this blue chip stock today set you up for life?
Why is American Express an evergreen investment?
American Express is often considered a credit card company, but it doesn't operate the same business model as Visa (V +0.33%) or Mastercard (MA +0.10%). Unlike those two credit card giants, which only co-issue branded cards with banks and don't handle the actual accounts, American Express issues its own cards and handles the accounts through its own bank.
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Visa and Mastercard generate most of their revenue by charging merchants "swipe fees" whenever their cards are processed, but American Express generates both swipe-fee revenue and interest income from its issued cards. That key difference makes American Express more resistant to macro headwinds for consumer spending and interest rate swings.
Higher interest rates generally impact all three companies by curbing consumer spending and reducing their swipe fees, but American Express can offset that pressure by generating higher net interest income. That diversification also provides it with greater protection against proposed caps on swipe fees from merchants and antitrust regulators.
NYSE: AXP
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What challenges could American Express face?
American Express' evergreen business model made it one of Warren Buffett's favorite stocks, but it still faces some near-term challenges. President Trump recently proposed a temporary 10% cap on credit card interest rates, which would meaningfully reduce American Express' net interest income. However, that plan faces significant legal and political hurdles -- and it won't be enacted anytime soon or throttle its near-term growth. It also faces competition from other card-issuing banks and more diversified fintech platforms.
Why is American Express still a worthwhile investment?
Despite those challenges, analysts still expect American Express' EPS to grow at a 14% CAGR from 2025 to 2027. That steady growth should be supported by its focus on more affluent, lower-risk customers, its overseas expansion, and higher travel spending.
It's still reasonably valued at 20 times this year's earnings, and it should continue plowing its cash into its buybacks and dividends. It only pays a forward yield of 0.9%, but its low payout ratio of 21% gives it plenty of room for future hikes. American Express isn't a high-growth stock, but it should continue to outperform the market and deliver solid long-term gains.
