American Express Company (AXP), which is best known for the charge and credit card services and travel services it offers to customers across the globe, has witnessed steady growth in its vital indices, and its stock prices have been steadily rising over the past two quarters. However, its competitors Visa (V) and MasterCard Incorporated (MA), have better balance sheets, expected revenue growth and EPS. Further, the quarterly dividend declared by the company in November is not one that the investor looking for a good dividend yield would be excited by. As we shall see below, the combination of these factors make AXP a good stock based on recent performance, but not necessarily the best option in terms of dividends.
American Express' Growth Story
Following a calamitous drop in share prices in 2008-9, American Express has posted a handsome recovery, and its performance in the first three quarters of 2013 has been impressive. Its Q3 revenue of $8.30 billion was higher than the consensus estimate of $8.22 billion. This represented a 5.6 % YoY rise in the company's quarterly revenue. Further, its Q3 EPS (earnings per share) was $1.09, and analysts believe the company will post an annual EPS of $4.93. This represents an estimated EPS growth of 5.3% in 2014.
Further, AXP has had a great year on the stock market, with its stock price rising by 48.71%. As such, it has a P/E ratio of 19.99.
Performance of rivals MasterCard and Visa
It cannot be denied that American Express has been flying high, but this is true of its rivals as well. MasterCard in particular has zero debt and recently announced a share repurchase plan of $3.5 billion when the current $2 billion scheme ends. Further, it has shown a 55.65% rise in stock price in 2013, thus beating American Express by a healthy margin. As can be seen from the chart below, the expected performance of both MasterCard and Visa is expected to be better than that of American Express.
Estimated revenue growth 2014
Estimated EPS growth 2014
The dividend story
On 19th November, AXP's board of directors announced a quarterly dividend of $0.23, payable on February 10,2014. This represents a $0.92 annualized dividend and a yield of just 1.1%. It is true that American Express moves just 19.6% of its earnings into dividends, leaving lots of space for growth. However, if history is anything to go by, the company has raised its payouts by just 3.6% in the last five years.
Hence it is no surprise that AXP represents the second lowest yield on the Dow Jones Index. However, in terms of dividend, its rivals pay even less. Visa has a 0.8% yield (lowest in the Dow Jones Index) and MasterCard is the worst at 0.3%.
Unique Competitive Advantages
American Express does marketing like no other credit company. Amex allows customers to sync their cards with social networks in order to receive discounts or statement credits on their accounts. By doing this through social media, Amex is able to partner with companies looking to increase their social media presence, and also benefit from the social media marketing themselves. Amex is able to provide its clients with additional services and advantages for being cardholders, while also receiving friend referral business through social media. The cost for this marketing is low due to the online nature and the fact that they are partnering with companies like Amazon (NASDAQ:AMZN) to allow the statement credits. A recent deal involved offering Amex shoppers a $25 statement credit when you spent $75+ on Amazon. This was particularly helpful during the holiday season, as many customers were going to shop online anyway.
Incentives such as these give American Express a competitive advantage. With such strong customer loyalty and continued client incentives, growth should continue for American Express. Of course there is also the possibility of a wild card promotion, which could result in something completely unforeseen by investors offered by American Express.
What should the investor do ?
American Express has done well for itself in terms of revenue growth, EPS and other vital indices. On the other hand, its competitors have done and are expected to do better on many counts. As such, the fact that their dividend yields are lower than that of American Express is cold comfort. Unless one is specifically aiming at including one of these three companies in his/her portfolio, AXP is not a great investment in terms of dividend. However, the company's performance has been and is expected to remain strong, so it would not make sense to disregard the stock either. Rather, those looking for a short-term investment can consider buying into this stock, while those who have already bought into AXP may consider holding it for now.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.