A Brief History of American Express' Returns

Despite constant attempts by analysts and the media to complicate the basics of investing, there are really only three ways a stock can create value for its shareholders:                     

1. Dividends.
2. Earnings growth.
3. Changes in valuation multiples.

In this series, we drill down on one company's returns to see how each of those three has played a role over the past decade. Step on up, American Express (NYSE: AXP).

AmEx shares returned 116% over the past decade. How'd they get there?

Dividends accounted for a big part of it. Without dividends, shares returned 64% over the past 10 years.

Earnings growth over the period was surprisingly strong given the financial crisis in 2008 and 2009. Since 2001, AmEx's normalized earnings per share have grown at an average rate of 11.2% per year. Considering the immense losses suffered in the credit card divisions at rivals Citigroup (NYSE: C) and Bank of America (NYSE: BAC), AmEx's performance is exceptional, and highlights the company's niche in providing credit to well-to-do clients who tend to be more credit-worthy and less affected by the slowing economy.

And have a look at the company's valuation multiple:

Source: S&P Capital IQ.

The big spike around 2009 was due to a temporary decline in earnings, not market exuberance. Compared with 2001, AmEx's valuation multiple has dropped from about 23 to a current level of 15. That's had the effect of preventing some of the company's earnings growth from being reflected in shareholder returns. Going forward, shares look reasonably valued -- shares of many financial companies do, in fact -- and so shareholders could benefit from expanding valuations on top of rising earnings.

Why is this stuff worth paying attention to? It's important to know not only how much a stock has returned, but where those returns came from. Sometimes earnings grow, but the market isn't willing to pay as much for those earnings. Sometimes earnings fall, but the market bids shares higher anyway. Sometimes both earnings and earnings multiples stay flat, but a company generates returns through dividends. Sometimes everything works together, and returns surge. Sometimes nothing works and they crash. All tell a different story about the state of a company. Not knowing why something happened can be just as dangerous as not knowing that something happened at all.

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