Although 2015 isn't half over yet, we can probably say it won't go down as one of American Express' (NYSE:AXP) finest years. The card giant lost one of its biggest clients when Costco Wholesale dumped AmEx as its exclusive partner. Around the same time, JetBlue ditched it as the partner for the airline's co-branded credit cards.
As if that one-two punch wasn't damaging enough, the company lost a high-profile lawsuit brought by the Department of Justice, which claimed that some American Express business practices violated antitrust statutes. Oh, and the strengthened U.S. dollar has constricted revenue, as this most global of companies takes in fewer greenbacks with every purchase in foreign currency.
It would seem counterintuitive, then, for AmEx to incur additional expense by raising its quarterly dividend. But that's precisely what it did last week, lifting the payout by 12% to $0.29 per share. Is the company being reckless, or can it afford to be more generous despite those unhappy recent developments?
The enhanced dividend didn't do much to lure investors back to AmEx. So far this year, the company's stock is down 12%, in contrast to eternal rivals Visa, and MasterCard, which are up a respective 6% and 8%. Those recent headlines, it seems, have drained away enthusiasm for AmEx's stock.
Yet on a fundamental basis, the company actually looks pretty good. Yes, revenue has declined -- by 3% on a year-over-year basis in the most recently reported quarter, to nearly $8 billion -- but net profit was up by 6% to $1.5 billion. The latter was higher than many expected; on a per-share basis it was $1.48, trouncing analyst projections.
Costco was a tough loss, but the company isn't taking it lying down. Less than two months after its breakup with the retailer, AmEx landed a co-branding deal with veteran brokerage house Charles Schwab.
Although this doesn't fully replace the disappearing Costco business, it does provide the card giant with a potentially lucrative base of relatively high-net worth individuals who aren't afraid to spend money. More importantly, it indicates the company is actively and successfully hustling for new business.
The $1 billion question
Nice per-share profit figures and fresh new deals are all well and good, but the fundamental issue is whether AmEx can afford its new dividend.
In my opinion, it can. The company is a cash-generating machine, with a free cash flow level approaching a whopping $10 billion in its fiscal 2014. Very little of that actually goes to dividends, with the payout costing it a bit over $1 billion that year. It also spend around $4.4 billion on its share buyback program, which was recently renewed.
Even factoring in the vaporization of the Costco business -- which accounted for roughly 10% of its total worldwide cards in use -- AmEx would still be living comfortably within its financial means.
Money well spent
Although some might be concerned that the company has better things to do with its dosh (i.e., put it into efforts to replace more of the Costco sales, or stay out of legal trouble), it's clear it can afford the raised dividend. The timing of the increase might be a little iffy, but the fundamentals underlying it are sound.
At the new rate, AmEx's dividend yields 1.4% on the current stock price. This figure, by the way, far eclipses those of Visa and MasterCard (both 0.7%).