American Express, one of the best investments of Buffett’s career

American Express

Company bio

Company establishment

American Express (ticker: AXP) was established in Buffalo, New York, in 1850. It was first formed by the merger of three different express companies.

Amex cards

American Express introduced their first paper charge card in 1958, the Gold Card in 1966, the Green Card in 1969, the Platinum Card in 1984, and the Centurion Card in 1999.

Issuance of traveler’s checks

In 1890, James Congdell Fargo felt inconvenienced after one of his trips to Europe. Although he was president of American Express and carried a traditional letter of credit, he found it difficult to obtain cash except in major metropolitan cities. So Fager and Marcellus Fleming Berry invented the American Express Travelers Check, which was issued in 1891 in denominations of $10, $20, $50 and $100. The issuance of travelers checks made American Express a truly global corporation.

Travel services

American Express established the Travel Division in 1915, combining all services that make travel easier, and soon they established the first travel agency under the group.

Transformation into a holding group

On November 5, 2008, American Express submitted an application to the Federal Reserve Board for transformation into a commercial bank and was approved.

Typical Buffett Holdings

Fit Buffett’s investment principles

I once wrote an article to deeply analyze some of the commonalities of the important holdings of Buffett’s investment career. Please refer to my previous post “The commonalities of Buffett portfolio – cheap, fixed income, repurchase“. In Buffett’s 1980 letter to shareholders, he called American Express a “unique” company.

Bought during Amex crisis

In 1964, American Express was deeply involved in the “salad oil scandal“, which caused the stock price to be cut in half. At that time, Buffett made a huge bet and directly used 40% of the funds of his own partnership investment company to buy American Express. Bought 5% of the American Express stake, and then continue to increase the shareholding ratio. This is the first time Buffett has held shares in American Express, but later, after earning a considerable return, he chose to dump the shares.

Why Buffett sticks to Amex for many years?

Credit cards or payment platforms are types of businesses that are attractive to invest in, not just based on asset value. In 1963, Buffett invested in American Express, the leader in the traveler’s check and credit card market. American Express is the standard answer to investing in the post-war U.S. economic boom. As the United States becomes wealthier, the middle class spends more and travels more frequently; most importantly, the middle class in the United States trusts American Express to provide them with consumption and travel assistance.

But I still have to admire Buffett’s long-term investment ability. For this part, please refer to my previous blog article “Possibility of long-term holdings, Deep dive on Buffett’s case

Holds 20.3% of the shares

As mentioned earlier, as early as 1964, Buffett bought the stock of American Express for the first time. He made a big fortune from this investment, but sold the stock within a few years.

Buffett rekindled his interest in American Express in 1993. It is now the second-longest holding in Berkshire Hathaway (tickers: BRK.A and BRK.B ), the longest one is Coca-Cola (ticker: KO ). Berkshire’s stake in American Express ranks fifth in Berkshire’s portfolio by market capitalization, and Berkshire has 20.3% stake in Amex.

Berkshire’s agreement with Amex was to always vote for a majority of Stephen Squeri’s shares, as recommended by the board, as long as he was CEO. It means that Berkshire wants the management of American Express to rest assured that Berkshire only wants to be a simple shareholder and will not intervene in major operations, personnel, and management decisions of American Express.

Value of current Amex holdings

Buffett began buying American Express for Berkshire in the early 1990s. In his 2022 annual letter to shareholders, he said the company essentially completed its stock purchases in 1995 at a cost of $1.3 billion.

Some three decades later, those stakes are now worth $22.4 billion, a 17-fold increase in 30 years. That doesn’t include the $302 million a year Berkshire now receives in dividend income from American Express, representing a 23% annual return on the original purchase price. Amex’s management has been raising its annual dividend, which has increased by 160% over the past 10 years, which means Buffett’s annual return on Amex will only increase in the coming years.

Future prospects

  • Buffett’s investment in American Express has created a capital miracle for Berkshire shareholders.
  • American Express had a rough time in the early 2010s, but has now returned to solid long-term growth.
  • American Express has positioned itself for the long-term growth of the company, including Berkshire shareholders, over the next decade and beyond.

One of Buffett’s most successful investments

Buffett’s investment in American Express will provide better long-term performance for Berkshire’s overall portfolio.

One of the most accomplished investors of all time, Buffett has made some smart acquisitions during his decades-long career as Berkshire CEO. The media and pundits tend to focus on acquisitions like See’s Candy, Geico Insurance, and the sprawling acquisitions of Coca-Cola and Apple (ticker: AAPL ) stock. But one of Buffett’s most successful investments that is rarely discussed is American Express.

That’s why Amex has been such a great investment for Buffett and Berkshire, and why the 151.6 million shares it owns are likely to be worth even more in 10 to 15 years’ time.

Rebirth of the company

The investment community worried about the future of Amex in the early 2010s. The company experienced decades of growth, fueled by growing affluent U.S. credit card users, but its market share began to be lost to the more open Visa (ticker: V) and MasterCard (ticker: MA) payment networks, which had better merchant distribution and Fast-growing debit card business category. Those concerns came to a head in 2015, when longtime partner Costco (ticker: COST ) decided to switch its loyalty card to Visa. the

To get the business back on track, Amex brought in a new management team between 2017 and 2018. They have a few main priorities to get the business back to growth, but the foundation is to increase merchant distribution in the US and key international markets to align Amex’s value proposition with its competitors. That’s the core driver of the whole business: If customers can’t pay with Amex at a retailer, they’re forced to choose Visa, MasterCard or another payment method.

Key operating figures

According to a Nielsen report released in 2022, 99% of U.S. merchants that accept credit cards now accept Amex. A total of 10.6 million U.S. merchants accept Amex; 44 million international merchants. Compared with Visa and MasterCard, these two figures are the same in the United States, and the international part has 2 million fewer international merchants than Visa, but 7 million more than MasterCard international merchants.

This has led to a recovery in Amex active users since 2018 (excluding the 2020 pandemic hiccup), reaching 133.3 million active cards by the end of 2022, compared to 114 million in 2018.

More cards on the Amex network means more payment volume, which means more revenue for Amex. In 2022, revenue excluding interest expenses will increase by 25% year-on-year to US$52.9 billion, and is expected to grow by 15% to 17% in 2023, and annual revenue is expected to increase by more than 10% from 2024 onwards.

Since the majority of Amex’s new cardholders come from millennial and Gen Z consumers, these new customers will only increase their spending at Amex when they enter their peak spending years (ages 40 to 60). As long as the company consistently gains more cardholders each year, it should be able to grow revenue and dividend payments for years, if not decades, to come.

About the credit card industry

Readers are advised to refer to my previous articles on credit card companies, including “The differences between Visa and Mastercard?“and “Has the moat of ubiquitous credit card networks loosened?

And my introduction to the credit card industry in subsections 3-3 of my book “The Rules of Super Growth Stocks Investing“, pages 097-100.

Aggressive stock buybacks

In addition to steady growth and dividend income, Berkshire’s stake in Amex should climb over the next 10 to 20 years, even if Berkshire no longer buys Amex stock. How can this be? That’s the amazing power of stock buybacks. Amex has reduced its outstanding shares by 32% over the past 10 years, using its excess cash flow and continually buying back its own shares from shareholders who sold them. Berkshire has grown its stake in Amex to more than 20% just by holding its existing stake.

Amex plans to continue repurchasing shares. At the current pace, it could see its outstanding shares cut in half in 15 years. As long as Berkshire doesn’t sell any of its shares, its 151.6 million shares could raise its stake from 20% to 40%. If Amex’s annual revenue continues to grow, the market could value the company higher than its current market cap of $134 billion.

Combined with earnings growth and share repurchases, Berkshire’s stake in Amex could be worth $60 billion to $80 billion after 15 years, providing its shareholders with stable long-term value creation. That’s a decent rate of return on an initial investment of $1.3 billion.

American Express
credit: Wikimedia

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