Warren Buffett and the stocks Berkshire Hathaway owns almost defines the billionaire. But it turns out that there's one little-discussed reason why it owns 14.2% of American Express (AXP 0.68%).
Source: Flickr / DaveOnFlickr.
The hidden investment gem
Buffett is well known for his remarkably powerful and profitable buy-and-hold strategy. After all, he last bought shares of American Express more than 15 years ago in 1998, which is why the $1.3 billion investment in American Express by Berkshire Hathaway is now worth more than $14.5 billion. Talk about remarkable returns.
Yet, one of the fascinating things about American Express that Buffett often mentions, but rarely is considered, is the power of its name, or brand: American Express.
In 2007, Buffett said the "powerful worldwide brand" of American Express was one of the things that are "essential for sustained success," and helped protect the business itself.
And "powerful" may be an understatement of the true value of American Express's brand. Consider when consultancy Interbrand released its latest Best Global Brands ranking, and it found the brand value of American Express grew by 12% last year to stand at a staggering $17.6 billion, making it the 23rd most-valuable brand on the planet.
Its next closest competitor in the financial-services industry was bank HSBC, with a value of $12.2 billion. It would have to grow by nearly 50% in order to match American Express.
While it should come as no surprise, another well-known Buffett investment Coca-Cola -- which is also a brand he often praises -- is the third most-valuable brand in the world, as its brand value alone eclipses $79 billion.
The power of the brand
Deloitte, a consultancy, recently released a fascinating article about the commoditization of the banking industry. It began by noting:
With similar product features, pricing structure and promotional offers, basic banking products exhibit characteristics of a commoditized product, i.e., customers do not see much difference between a product offered by Brand X or Y. As such, customers are unlikely to have preferences for any specific brand.
As a result of the technology advances that are pushing customers out of banks themselves, the industry is becoming more commoditized every day, and banks are having an even more difficult time differentiating themselves from competitors. Deloitte argued that banks need to do a better job of ensuring customers are satisfied, and efforts must be made to guarantee -- even in the impersonal technology landscape -- more connections are made with customers.
Yet, one of the most noteworthy revelations from the study was its admission that American Express was "a positive example" in the financial landscape as it "has continuously invested in meaningful social and digital experiences." It went on to add:
For its digital wallet, American Express Serve, AmEx went beyond the traditional tools and entered into several partnerships -- with technology firms, carriers and payment companies -- to provide personalized consumer experience, offerings and deals based on their interests, past usage and spending habits.
American Express is not just an example of a firm that has a powerful brand; but it's also one that is both working and succeeding at growing the value of it.
Source: Flickr / Images_of_Money.
The key takeaway
Does this mean we should dive in and buy American Express? Not necessarily, because Buffett himself has said, "A business with terrific economics can be a bad investment if the price paid is excessive."
More work needs to be done to determine the true value relative to the price of AmEx; but, undeniably, one incredibly valuable piece of American Express is the name itself.
