In the past year, Warren Buffett’s Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) has sold many of its key stocks, including Apple (NASDAQ: AAPL) and Bank of America (NYSE: BAC). These decisions boosted its cash reserves to record levels, which led some investors to worry that Buffett is preparing for a market downturn.
A pullback wouldn’t be surprising. The S&P 500 (SNPINDEX: ^GSPC) has risen nearly 80% in the last five years and currently trades at more than 30 times earnings, indicating it might be overvalued. However, Berkshire Hathaway has not sold any shares of American Express (NYSE: AXP), which represents 14.8% of its portfolio. Let’s explore why Buffett continues to hold this strong blue-chip stock and why it could still be one of the best investments for $1,000 today.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
A Resilient Business Model
Berkshire Hathaway holds significant shares in American Express, along with Visa (NYSE: V) and Mastercard (NYSE: MA). The $43.6 billion investment in American Express far exceeds the $2.6 billion and $2.1 billion stakes in Visa and Mastercard, respectively.
While American Express is often compared to Visa and Mastercard, it operates quite differently. American Express acts as a bank, payment processor, and card issuer, backing its cards with its own balance sheet. In contrast, Visa and Mastercard do not issue cards or hold consumer debt; they partner with banks that create co-branded cards and extend credit. All three companies earn revenue through swipe fees charged to merchants for card transactions.
The American Express model involves more credit risk compared to Visa and Mastercard. However, it focuses on higher-income customers with strong credit histories, which reduces long-term credit risk but also limits customer growth. As a result, American Express cards are accepted at fewer locations, particularly outside the U.S.
This diversified model of American Express allows it to withstand interest rate fluctuations better than its competitors. During 2022 and 2023, rising inflation and interest rates have challenged Visa and Mastercard due to decreased consumer spending. Although inflation did affect American Express to some degree, its appeal to wealthier consumers helped it thrive, with increasing profits in its banking segment fueled by higher rates.
Looking ahead, decreasing interest rates could benefit American Express’ credit card business while offsetting potential declines in its banking operations. This dynamic makes the company a solid investment choice regardless of market conditions.
Consistent Growth Through Buybacks
From 2013 to 2023, American Express experienced compound annual growth rates (CAGRs) of 6% in revenue and 9% in diluted earnings per share (EPS), while also buying back nearly one-third of its outstanding shares. These steady growth figures have persisted over the past three challenging years.
|
Metric |
2022 |
2023 |
9M 2024 |
|---|---|---|---|
|
Total revenues (net of interest expense) growth (YOY) |
17% |
14% |
9% |
|
Diluted EPS growth (YOY) |
166% |
14% |
28% |
|
Change in shares outstanding (YOY) |
(2%) |
(2%) |
(3%) |
Data source: American Express. YOY = Year over year. Table by author.
For 2024, American Express projects a 9% revenue increase, while EPS is expected to rise by 23% to 25%. This anticipated growth results from a stabilizing U.S. economy, increased adoption among higher-income Gen Z and millennial consumers, and its global expansion.
Analysts project a revenue CAGR of 9% and a 15% CAGR for EPS from 2023 to 2026. The stock appears undervalued at 19 times next year’s earnings, complemented by a modest forward yield of 1%.
Buffett’s Continued Confidence in American Express
Warren Buffett began investing in American Express in 1998 and has not adjusted his position since 2012. The stock has surged approximately 430% from his average purchase price of $55.50, yet it seems to have more potential for growth in the coming years. This may explain Buffett’s lack of reduction in his American Express holdings amid recent sales of other longtime investments, indicating it remains an excellent option for smaller investors to allocate $1,000.
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Bank of America is an advertising partner of Motley Fool Money. American Express is an advertising partner of Motley Fool Money. Leo Sun has positions in Apple and Berkshire Hathaway. The Motley Fool has positions in and recommends Apple, Bank of America, Berkshire Hathaway, Mastercard, and Visa. The Motley Fool recommends the following options: long January 2025 $370 calls on Mastercard and short January 2025 $380 calls on Mastercard. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.
