American Express Company (AXP ) is a global financial services company. It has a highly valuable brand and a profitable business model. These qualities have attracted high profile investors, including Warren Buffett, to purchase American Express stock. Berkshire Hathaway (BRK-B) is the largest institutional holder of American Express stock; Buffett’s investment conglomerate owns 151.6 million shares of AXP stock, for a nearly 16% stake in the company.
But this is not a favorable climate for American Express. It is dealing with the loss of a major retail customer, and also the strong U.S. dollar. Both of these challenges have been weighing on its growth throughout 2016.
One positive for American Express stock is that the company continues to generate sufficient profits to reward shareholders with rising dividends and share buybacks. For example, on Sep. 27, the company approved a 10% dividend increase and a 150 million share repurchase authorization. The quarterly dividend was raised to $0.32 per share, up from $0.29 per share previously. The next quarterly dividend is payable on Nov. 10.
American Express stock has a forward annualized dividend of $1.28 per share. This represents a 1.9% current dividend yield based on the most recent closing share price.
Fundamental Challenges
Investors have reason to be concerned about the company. American Express is seeing a number of fundamental challenges, most prominent is the sale of the Costco Wholesale Corporation (COST ) card portfolio. The loss of Costco hit American Express hard. This caused American Express’s revenue and earnings per share to fall last year by 4% and 10%, respectively.
Another negative facing American Express is the strong U.S. dollar. As a global company, the rising U.S. dollar makes export products and services less competitive. It also reduces the value of revenue generated internationally. Last quarter, American Express saw a 2% reduction in revenue in its International Consumer and Network Services segment because of foreign exchange fluctuations. This exposes American Express to heightened currency risk.
These fundamental challenges have limited the company’s average revenue per card and operating margins in recent years.
These headwinds are expected to negatively impact American Express’ earnings growth this year. Analysts on average expect American Express to see a 1% decline in 2016 earnings per share, compared with 2015.
The good news is that American Express is at least beating analyst expectations for its quarterly financial results so far this year. For example, on Oct. 20, the stock rose 9% after beating quarterly estimates. American Express reported earnings per share, adjusted for non-recurring items, of $1.20 per share for the fiscal third quarter. Revenue came in at $7.77 billion for the quarter. Analysts expected American Express to earn $0.97 per share and $7.7 billion of revenue for the quarter.
In addition, the company raised its guidance for the full year. American Express now expects adjusted EPS of $5.90-6.00 per share for the fiscal year, up from previous expectations of $5.40-5.70 per share. American Express can maintain high profitability because of its cost cuts, which keeps profit margins high. To that end, management intends to reduce overall costs by $1 billion by the end of 2017.
Future Growth Catalysts
Despite the pressures facing American Express, the company also has growth catalysts. The broader financial sector will benefit from a rise in interest rates in the U.S. Higher interest rates increase the interest earned on loans. An anticipated rise in earnings from this has allowed many stocks in the financial sector to increase shareholder dividends throughout 2016. U.S. Bancorp also increased their dividend by 10% a few months ago.
Find out a list of the best regional banks for dividend investing here.
In addition, American Express intends to grow earnings through internal growth investments in strategic business areas. Going forward, American Express is focusing investment on its core growth initiatives, which include growing its card member base and steering new customers toward premium services. Furthermore, American Express intends to invest to grow its merchant network, increase its international footprint and expand its customer rewards programs to entice new business relationships.
Dividend Growth Expectations
Investors can continue to expect American Express to increase its dividend regularly. The company has a proven track record of raising its dividend over time. American Express has had an annualized dividend growth rate of 8.8% during the last five years. Check out AXP’s dividend growth history from 1993 to date in our growth history section.
A big reason why the company can continue to grow its dividend, even though its earnings growth is stagnant, is because it has a low payout ratio. After the recent 10% dividend increase, American Express has a 23% payout ratio as a percentage of its projected 2016 earnings per share. This is a low payout ratio that leaves room for future dividend increases.
However, no company can continue to increase its dividend forever without supportive earnings growth. If American Express’ earnings keep declining, continued dividend increases are unsustainable. This may limit the company to single-digit dividend growth going forward.
The Bottom Line
American Express recently increased its dividend. Using our Dividend Payout Changes and Announcement Tool, find a complete list of stocks, like AXP, that changed their dividend payout policies recently. This tool allows you to filter by corporate action – such as initiation, increase or decrease of dividends – on a date of your choice. For example, if you were to filter out September 27, you would see AXP’s dividend changes there.
Be sure to check out Dividend.com’s news section for a deep dive into other dividend policy changes recently announced.
