American Express: A Strong Investment Amid Market Fluctuations

Berkshire Hathaway‘s (NYSE: BRK.A) (NYSE: BRK.B) assets have shifted significantly in recent years. Currently, the value of Berkshire’s controlled companies surpasses that of its public equity portfolio. Notably, even Berkshire’s cash, cash equivalents, and marketable securities hold more value than its stock holdings.

Although Berkshire has decreased its investment in major holdings like Apple and Bank of America, American Express (NYSE: AXP) has remained a consistent investment for decades. This stock now comprises 14.5% of Berkshire’s equity portfolio, making it the firm’s second-largest holding after Apple.

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Long-term, American Express has outperformed the market. However, year to date (YTD), it has lagged behind the S&P 500 and Nasdaq Composite indexes. Investors should consider looking more closely at this dividend-paying value stock now.

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Understanding American Express’ Unique Business Model

The business model of American Express sets it apart from pure-play payment processors such as Visa and Mastercard, where Berkshire has smaller investments. Unlike Visa and Mastercard, which partner with banks to issue cards, American Express issues its own cards, taking on more risk by extending credit directly to consumers and small businesses.

This approach allows American Express to target affluent customers, who often withstand economic fluctuations better than other demographic groups. Additionally, American Express functions as a bank, providing checking and savings accounts alongside its credit offerings. While this creates greater risk compared to Visa and Mastercard, it also positions American Express for higher growth potential when managed effectively.

American Express strategically integrates financially stable, high-spending customers into its ecosystem. The company charges higher annual fees than Visa and Mastercard, but it also offers attractive rewards and benefits that compel users to favor its cards for everyday purchases. As a result, American Express has consistently grown its revenue and earnings, with a notable surge after the pandemic as it sought to engage younger consumers like Gen Z and millennials.

AXP Revenue (TTM) data by YCharts. EPS = earnings per share.

Current Valuation and Market Performance

Despite American Express’ strong business performance, its stock has declined significantly this year. The emphasis on affluent consumers, while beneficial in robust economic times, means that downturns in wealth—especially in asset classes like stocks—can negatively impact their spending behaviors. Additionally, tariffs may increase consumer goods and service costs, further affecting spending habits.

As detailed in recent market analysis, American Express has fallen more than key financial indices YTD, in contrast to Visa and Mastercard, which have shown resilience.

V data by YCharts.

Currently, American Express is down 22.9% from its peak, making this downturn a potential opportunity for long-term investors. Historically, American Express has had an affordable valuation, with a five-year average price-to-earnings (P/E) ratio of 18.4. The present P/E ratio sits slightly lower at 17.9, while its price-to-free cash flow ratio is a competitive 14.8, indicating it may be undervalued.

While future earnings might dip if consumers reduce spending, there are options available for investors. American Express has a powerful tool at its disposal: buybacks.

Strategic Buybacks Benefit Shareholders

Berkshire’s longstanding investment in American Express has grown from a 10% stake to 21.6%, largely due to buybacks. This strategy mirrors the success seen with Coca-Cola, another Buffett favorite. By repurchasing shares, American Express effectively boosts earnings per share (EPS) by shrinking the number of shares outstanding. Over the last decade, the company has achieved a 30% reduction in its share count.

To illustrate, if a business reduces its shares from 100 to 70, an investor maintaining 14 shares sees their ownership rise from 14% to nearly 20%. In this scenario, net income remains consistent at $1,000; EPS increases from $10 per share for 100 shares to approximately $14.29 for 70 shares, enhancing the stock’s attractiveness through valuation metrics.

American Express’ ability to perform buybacks stems from its high profit margins and reliable cash flows. Additionally, the company has been known to implement sizable dividend increases; its latest announcement in March included a 17% raise, bringing the quarterly dividend to $0.82 per share and generating a yield of 1.3%.

While American Express’ comparatively low yield may initially seem unremarkable, it is important to consider the broader consequences of its capital return strategy on shareholder value.