American Express Company (AXP)

American Express has some of the highest returns on its business because of its core wealthier demographic, which spend several times more on card purchases than Visa or Mastercard (MA) customers.

On November 10, 2008, American Express announced that it would become a holding bank. The American Express Centurion Bank and American Express Bank, which have a combined assets of $50 billion and $14.4 billion of deposits, are now classified as holding banks.^[1] Because it is now considered a holding bank, it can participate in the government economic stimulus plan. On December 23, 2008, AXP announced that it plans to sell $3.39B in preferred stock and 15% of common stock to the US Treasury through its Troubled Asset Relief Program Capital Purchase Program.^[2] This gives American Express stability during a time of financial volatility and low liquidity.

• AXP has one of the top global brands. It attracts high-spending, creditworthy customers who are attractive to banks that issue credit cards. Since AXP won the anti-trust suit in 2004, many banks have started offering American Express branded cards.
• There is a worldwide trend to use credit cards instead of cash, which has boosted the stock prices of Visa (V) and MasterCard (MA), but AXP should also be included in this group, especially longer term as India and China produce more upscale consumers.
• AXP is a Warren Buffett stock that usually sells at a premium PE. But it was available yesterday at a forward PE ratio of only 11.5 times earnings.
• Return on equity has been running over 35% per year.
• Zero sub-prime exposure.
• High free cash flows and rock solid balance sheet.
• Shareholder friendly. AXP pays a growing 1.7% dividend and management also returns 3-4% a year via share buybacks.
• Great Sponsorship: Aside from Berkshire Hathaway, AXP is the #1 holding of Blue Ridge Capital (Griffin) and large positions are held by Clarium Capital (Thiel), Eton Park Capital (Mindich) and Tweedy Browne among others.
• High lending standards.
• The travelers check business is a true cash cow.

Because American Express relies much less on "penalty fee income", it is better positioned with regards to new consumer protection legislation passed by Obama than competitors such as Visa and Mastercard. By relying less on these fees, it is hurt relatively less than both Visa and Mastercard

America Express has been implementing cost cutting methods. AMEX was able to remove 22% of its expenses from 2008 to 2009. The company plans to aggressively continue this reengineering of its business to lower its costs and keep pace with the falling consumer spending.^[1]

American Express is making preparations to repay its $3.39B loan it took through the Troubled Asset Relief Program (TARP). The results from the government's stress test confirm that American Express is in a strong position. The report stated that AMEX did not asked to raise anymore capital while some of its competitors like Citigroup, Bank of America, and Wells Fargo will not fair so well.^[2]

The spin-off of American Express' investment arm will allow the company to focus on its core credit and charge cards products and decrease its exposure to the volatility of the brokerage industry. The banks governmental approval to become a holding bank gives AMEX the possibility to access capital infusions through the financial stimulus package.

American Express (AXP) recently sold a bond issue that yielded 7.34%. For reference, anything above 7% has typically be lumped in the category of "junk bonds".

AXP, it should be noted is rated "A" by the Standard and Poors rating agency. The top rating AXP could have is "AAA" and typically junk bonds have rating 6 levels below that of "A".

In the past AXP has issued debt in the 5% range which means bond investors are getting 40% more yield on AXP bonds currently and let's be honest, the risk of default here is virtually non-existent.

American Express has a unique closed loop network that allows the company to deeply understand its cardholders' behavior while reinforcing greater spend on their card (e.g., customized rewards programs)