By Jeff Bailey
After Berkshire Hathaway’s (NYSE:BRK.B) big stake was disclosed in International Business Machines (NYSE:IBM), Warren Buffett wrote in the letter to shareholders of the 2011 purchase that he hoped IBM shares would languish going forward.
The reason, as we’ve discussed here repeatedly in covering IBM, is that IBM is a major buyer of its own shares and Buffett wants IBM buybacks to reduce shares outstanding as much as possible, so his proportionate stake rises, and the way that happens is with a lower IBM share price. Buffett’s discussion starts on page six of the Berkshire letter.
Here we see the nearly 40% reduction in IBM shares outstanding over the past decade, alongside its – until recently – rising stock price.
IBM Shares Outstanding data by YCharts
And here we see the enormous trailing twelve months stock buybacks over that period, and the rise in IBM’s dividend, showing Big Blue really is above most companies in returning cash to shareholders. As Buffett noted in his letter: “I can think of no major company that has had better financial management, a skill that has materially increased the gains enjoyed by IBM shareholders.”
Turns out that among Buffett’s Big Four stock holdings – Wells Fargo (NYSE:WFC), Coca-Cola (NYSE:KO), IBM and American Express (NYSE:AXP) – there’s another buyback champ that is accomplishing a huge reduction in shares outstanding, and thus pushing up Berkshire’s stake even as the number of shares it holds remains steady. That would be American Express.
AXP data by YCharts
American Express’s 16% reduction in shares over the past decade trails IBM’s reduction by a lot. But during that period, as a bank holding company, in the wake of the financial crisis American Express had to demonstrate to regulars that it was building and maintaining a bulletproof balance sheet, which limited buybacks.
AXP Stock Buybacks (TTM) data by YCharts
Now the company is once again aggressively buying up its shares, with planned buybacks of up to $4.4 billion this year and of as much as $1 billion in 2015’s first quarter recently approved by the Federal Reserve Board as part of American Express’s capital plan. The company also signaled a 13% increase in its dividend, to 26 cents a share on a quarterly basis, from 23 cents. The last two years, American Express has bought back about $4 billion annually in stock and paid out about $900 million in dividends.
The buybacks goose EPS nicely.
AXP Net Income (TTM) data by YCharts
American Express has highly-regarded management that has kept costs impressively low, is pursuing transaction- and credit-card growth in the U.S. and abroad and is investing in payments technologies, an increasingly competitive area.
American Express shares are up about 30% over the past year. The forward P/E ratio is nearly 16, but earnings are expected to keep growing. William Blair analyst Robert Napoli sees 2014 EPS of $5.45, from $4.88 in 2013, and on to $6.05 in 2015.
Currently, the company’s credit problems are minimal, as it operates mostly among higher-income consumers and a growing economy tends to keep credit card loan losses down.
Two years ago, when Warren Buffett was wishing IBM shares would languish, his Berkshire owned 151,610,700 shares of American Express, or 13.0% of the company. As of the latest shareholder letter, that exact same share count equals 14.2% of American Express. That’s the highest percentage of a company Berkshire owns among its largest stock investments. And one can expect it will keep growing.