American Express (AXP) has long been a favorite of Warren Buffett, and now the stock has an even higher profile. After recent changes to the equity portfolio at Berkshire Hathaway (BRK.B), AXP has become the conglomerate's second-largest holding, right after Buffett cut up to 390 million Apple (AAPL) shares from the portfolio and scaled back his exposure to top holding Bank of America (BAC), as well. However, despite being a net seller of stocks yet again in Q2, Buffett held tight to his AXP shares, highlighting the legendary value investor's continued trust in American Express.
With AXP stock hitting all-time highs, investors might be wondering if it's still a smart buy. The stock has been outperforming the market this year, drawing attention from both optimists and skeptics. Amid the credit card stock's strong run, a recent downgrade by a major Wall Street firm has raised questions about its valuation at current levels.
Let's examine AXP's recent performance, explore its growth drivers and dividend history, and check in on the Wall Street consensus to help you decide whether AXP still deserves a spot in your income portfolio, or if it's time to reconsider this credit card giant.
AXP Outpaces the Market
American Express (AXP) is a global financial services giant known for its premium credit and charge cards, catering primarily to affluent individuals and businesses. Founded in 1850, Amex has built a reputation for high-end service and exclusive perks, like its famed Centurion Card.
AXP stock has been a remarkable outperformer, surging to a gain of 62% over the past 52 weeks and 38.6% in 2024 alone - easily besting the returns of the broader S&P 500 Index ($SPX) over both time frames.
Despite the soaring stock price, AXP hasn't neglected passive income enthusiasts. The company recently hiked its quarterly dividend by 17%, raising it from $0.60 to $0.70 per share. This brings the annualized dividend to $2.80 per share, yielding 1.09%. AXP's 35-year history of consistent dividend payments underscores its financial stability and commitment to shareholders as it prepares to dish out $1.99 billion in dividends this year.
With this kind of outperformance comes heightened scrutiny. AXP's market cap now stands at $184.9 billion, and it's trading at a P/E ratio of 19.42, raising some eyebrows about its valuation. Despite these concerns, American Express reported strong financial results for the second quarter of 2024, showcasing its ability to thrive despite economic uncertainties.
AXP Beats Q2 Earnings Estimates
The company achieved an 8% year-over-year increase in Q2 revenue, reaching $16.3 billion, driven by robust card member spending and a surge in travel and entertainment expenditures. Net income rose by 39% to $3 billion, with earnings per share (EPS) climbing 44% to $4.15, or $3.49 on an adjusted basis, which topped analysts' expectations. CEO Stephen Squeri attributed the impressive performance to the company's strategic focus on premium customers and its investments in digital capabilities.
A key growth driver has been AXP's successful engagement with younger generations. Millennials and Gen Z now make up over 60% of new accounts globally, and charged a record $54.45 billion on their Amex cards in Q2 - up from $48.96 billion in Q1 2024 and $48.05 billion in Q2 2023.
This success can be attributed to AXP's strategy of offering premium cards with lifestyle-oriented perks like streaming service credits and Uber Eats passes. The approach has paid off handsomely, with 77% of the 3.3 million new accounts in Q2 2024 attributed to premium cards, up from 70% in the same period in 2023.
Why the Oracle of Omaha is All-In on Amex
AXP is now Berkshire Hathaway's second-largest holding, right after Apple. By the numbers, AXP now comprises 12.4% of Berkshire's $318 billion stock portfolio, with the stake valued at over $39 billion.
This shift occurred after Buffett reduced his stake in Bank of America, allowing AXP to rise in the ranks. His long-time confidence in American Express stems from its unique business model and competitive advantages. Buffett has always favored companies with strong defenses, and AXP fits this criterion perfectly.
American Express itself is making strategic moves to expand its reach. The company recently acquired Tock from Squarespace for $400 million and added Rooam to its portfolio. These acquisitions are calculated efforts to enhance AXP's capabilities in restaurant reservations and payment processing.
Furthermore, American Express is focusing on enhancing customer experiences. The company plans to open a new Centurion Lounge at Salt Lake City International Airport in 2025. This 16,000-square-foot lounge will offer premium amenities like an outdoor terrace and a coffee bar, part of AXP's broader initiative to expand its airport lounge network and strengthen its position in the premium card market.
In addition to targeting high-end travelers, AXP also appeals to everyday consumers. The company has revamped its U.S. Consumer Gold Card with new benefits, including up to $120 in Uber Cash annually and 4X Membership Rewards points at restaurants worldwide. This demonstrates AXP's commitment to adapting its products to evolving consumer preferences, potentially attracting a broader customer base.
What's Next for American Express?
After a strong Q2, AXP's management bumped up their full-year earnings per share guidance for 2024 to $13.30-$13.80, from a previous range of $12.65-$13.15. This reflects their confidence in the business momentum, even in the wake of the strong performance so far this year, and surpassed analysts' average forecast for EPS of $12.96.
However, there's been some caution around the stock's breakout. On Aug. 21, Bank of America Securities downgraded American Express from "buy" to "neutral," while keeping a price target of $263 per share.
Noting that AXP “is trading near 10-year highs and at a 60% premium to card-issuing peers,” analyst Mihir Bhatia cautioned that the company doesn't have as much room as some of its competitors to impress Wall Street to the upside. While the analyst notes that AXP's premium valuation is "justified given [Amex’s] better credit quality and more spend-centric model, it is hard to see material multiple expansion absent faster spend-driven top-line growth.”
BofA also pointed out the potential for slower growth in billings to weigh on revenue, and cited evidence of softening travel trends from Amex partners, as well.
Despite this downgrade, analysts remain cautiously optimistic about AXP overall. Among 25 analysts, the consensus is a "moderate buy," with 9 rating it a "strong buy," 2 a "moderate buy," 12 a "hold," and 2 a "strong sell." However, the mean price target is $240.71, which is a discount of more than 7% to Thursday's closing price.
Conclusion
Despite trading near all-time highs, American Express still looks like a solid bet for long-term investors. Warren Buffett's sizable - and untouched - stake in the stock speaks volumes, and AXP's strategic moves and impressive growth among Gen Z show that it's not resting on its laurels. While some analysts urge caution due to consumer spending concerns, the company's strong financials and growth prospects are hard to ignore. However, with the stock hovering above Wall Street's mean target price, it might be wise to wait for a pullback before starting to build a stake.
On the date of publication, Ebube Jones did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
