American Express: Watch the Dividend

American Express (AXP) reported excellent numbers. 10% increase in revenues with a 21% increase in net income. Just the type of leverage that you want to see from a company who has invested heavily in re-engineering. Amex is still reporting some residual expenses attributable to the re-engineering process.

Bershire Hathaway (BRK.A), Warren Buffett's vehicle for wealth creation, has long held substantial ownership. Now that the business plan seems to have sparked properly the question becomes how to value the stock? In particular the dividend needs to be addressed.

The current dividend yield is approximately 1% which is roughly half the S&P dividend yield. Value investors will want to be rewarded. A dividend rate consistently stuck at half the market bench mark yield is not acceptable for value investing.

Either the dividend goes up or management is telling you something.

Comments

[weiwentg:]

George, BRK.A does not and has never paid a dividend. Buffett has said that he would prefer share buybacks, as they are more tax efficient. He also believes that Berkshire would best make use of its cash by holding it for acquisitions and investments. I'd like them to pay a dividend someday, but I don't think he'll do that as long as he lives.

2007 Apr 23 09:07 AM

[Geoff Consi...:]

Hi George:

Unless I recall incorrectly, Buffett has repeatedly stated that he believes that his job is to make use of earnings by reinvesting the best way he knows--he feels that this is what his investors are paying him for. I am inclined to agree. He has done a heck of a job. I do not own BRK, but if I did, I'd prefer to have him reinvesting net earnings rather than giving them back in cash.

2007 Apr 23 12:10 PM

[User 1:]

George plus readers, we sincerely apologize for the editing error. George's article was clearly about American Express and its dividend, not Berkshire Hathaway's. We've now corrected that.

George, in your original article you used the ticker AMP, the ticker of Ameriprise Financial, the financial advisory business spun out by American Express. We've changed it to AXP, American Express' stock ticker. Is that correct?

2007 Apr 24 01:55 AM

[George Guto...:]

Agreed It should be American Express AXP Many Thanks

2007 Apr 24 07:49 AM

[David Jackson:]

Hi George,

The other comments here actually illustrate an interesting point: the identification of dividends with "value" is questionable. Buffett realized that the best way to deliver long term value is to compound returns, and that explicitly means NOT paying a dividend. And the theoretical arguments for dividends are weak; see:

Why Dividend Paying Stocks are a Mistake

2007 Apr 24 02:08 AM

[the_Bird:]

AXP's dividend certainly could be higher, but they *have* nearly doubled it since the middle of '03.

2007 Apr 24 09:48 AM

[FIG trader_:]

You misunderstand Buffett and value investing, especially in regards to financials. In order to even make AXP's "dvd'd yield comparable with other "value" stocks, you would have to examine the past growth in the divdend as well as the total return (and/or capital appreciation) of AXP versus peers. There are plenty of stocks with 4% dvd's (most banks) that have not showed any where near the kind of appreciation experienced by AXP. Does that make them better value stocks????? (In fact, dvd is a small part of Total return for AXP) The reality is dividend payout ratios has more to do with capital management than anything else. If you really want to measure business performance, you would be better off looking at after tax ROE or return on total capital over many years. AXP has (pro forma for spinoff of AMP) ROE's in the 30%, probably double the average bank over the last ten years. Regardless of whether it pays 1% or 3% dvd, true measure will be the direction of (or sustainbility of the current level of its ROE). For what its worth, I don;t think it is sustainble and the stock is very richly priced. Cheers

2007 Apr 25 07:25 AM

[Alan:]

I am shocked to read a misleading and inaccurate article like this:

(1) "A dividend rate consistently stuck at half the market bench mark yield is not acceptable for value investing." According to whom??? Mr. Buffett certainly doesn't think that way.
(2) Okay, maybe a small faction of value investors demand yield (I would call those income investors). But anyone with nominal financial knowledge knows how to include stock buyback as part of dividend. In AXP's case, it returns 89% of its capital generated via buyback/dividends during the quarter. And since 1994, it returns 69% of capital and have a formal target of 65%.

2007 Apr 25 05:09 PM

[ing_rivera:]

You're right Alan I am also shocked to read such a misleading article too. I am also shocked on how a good website like SeekingAlpha let people without knowledge in business financials like the writer "Gutwoski" post an article here.

Like you said repurchases also count as dividend. Actually if the stock is selling below fair value, repurchases are better since owners are getting dollars for cents, in this case is better to increase your ownership by repurchases done by management than by receiving the dividends and buying the stock yourself because of tax efficiencies.

Based on AXP last repurchases, dividends and price at 65 their yield is a hefty 6%.

2007 Jun 02 05:09 PM