Explosive Growth for American Express
American Express has achieved record-setting results, marking a significant milestone in its almost two-century history. The financial giant raked in an impressive $60.5 billion in revenue and generated diluted earnings per share (EPS) of $11.21 in 2023, reflecting a remarkable 14% increase for both metrics from the previous year.
Looking ahead, the prospects remain bullish as management projects a robust growth in revenue of 9% to 11% and a corresponding increase in diluted EPS of 13% to 17% in 2024, potentially bringing it to a substantial range of $12.65 to $13.15. Additionally, American Express has hiked its quarterly dividend by 17% to $0.70 per share, currently yielding 1.3% annually at the current share price.
AXP Revenue (Annual) data by YCharts.
American Express’ Stellar Retained Earnings
American Express is impressing not only with its financial numbers but also with its prudent financial management. The company recorded a net income of $8.4 billion in 2023 and, after distributing dividends of $1.6 billion, ended the year with retained earnings of $6.8 billion. This surplus has allowed American Express to facilitate the acquisition of Nipendo, an Israeli payments company, among other strategic moves.
Moreover, American Express has displayed exceptional fiscal responsibility by reducing its net debt by a staggering 88% over the past two years, effectively shielding itself from costly interest expenses amidst the current elevated interest rates. Additionally, the company has executed substantial share repurchases, resulting in a notable 3% reduction in its shares outstanding over the past year, with a long-term repurchase program still underway.
Potential Pitfalls for American Express
American Express operates differently from major competitors Mastercard and Visa, functioning as a closed-loop network, which gives it distinct advantages in certain aspects but exposes it to higher risks. The company’s expenses for card member rewards and services have climbed significantly, while provisions for credit losses have more than doubled from 2022 to 2023, reflecting the potential peril of defaults amid persistently elevated interest rates.
American Express: A Hidden Jewel in the Market
Despite its recent surge, American Express is still underpriced when assessed with certain valuation metrics. With a price-to-free-cash-flow ratio of 8.3, the company remains notably undervalued in comparison to its historical averages and industry peers. This is underscored by its exceptional three-year compound annual growth rate (CAGR) for free cash flow, firmly establishing American Express as a hidden gem amidst the stock market.
| Metric | American Express | Mastercard | Visa |
|---|---|---|---|
| Free cash flow (TTM) | $18.9 billion | $10.9 billion | $19.1 billion |
| Market capitalization | $152.7 billion | $428.2 billion | $560 billion |
| Price-to-free-cash-flow ratio | 8.3 | 39.5 | 29.5 |
| 3-year free cash flow CAGR | 69.5% | 18.7% | 26.8% |
Data source: Finance Charts. Chart by author.
Is American Express Worth the Investment?
When a stock hits a record high, many investors automatically assume it’s overvalued. However, a deeper analysis of the company’s financial position and market position often highlights underlying value that the stock market is yet to fully appreciate. American Express, under the keen eye of Warren Buffett, is showing an extraordinary level of growth and commitment to enhancing shareholder value, making it a compelling investment option even at its current high.
Before making an investment decision regarding American Express, carefully weigh your options and consider seeking expert advice. The right investment approach can make all the difference in maximizing returns and minimizing risks. Remember, what works for others may not necessarily work for you, and vice versa.
