American Express (AXP) released its fourth quarter numbers on January 19th, which confirmed that consumers are altering their spending patterns. The average spend per customer over the 12 months rose by around 8% to $3933, as consumers turned to plastic to fund their purchases. However, apart from an increase in average spending, there were further highlights that underscore American Express's business strength:
- Revenue from billed payments increased over the twelve months
- Delinquency rates fell to 1.4% from 2.1% a year earlier
- Write-offs decreased to 2.5% from 4.8%
- The company has opened a $100 million fund to invest in digital commerce
Throughout the year, American Express has announced a number of card issuing partnerships, including a deal with the Bank of China that provides an excellent platform to catapult earnings from the region, and a deal with South Korea's KB Kookmin, the second largest card issuer in the country.
American Express has also introduced its pre-paid card service, a cheap option for consumers who don't want the temptation of credit. This card can be ordered online at no cost, and it promises no hidden fees. Abroad, it can be used without the foreign exchange transaction fees. American Express will earn fees from processing the transactions made with the card, rather than from direct costs on customers.
American Express shares yield 1.4%, with a dividend last year of $0.72 covered 5.72 times by its earnings. This is a higher yield than rival companies Mastercard (MA) and Visa (V) at 0.20% and 0.90% respectively.
Quarterly revenue growth at American Express lags behind its two main competitors, as does earnings growth. At 3.50%, its last quarter revenue grew by 3.50%, compared to Mastercard's 23.10%. Likewise, its earnings growth on the same period is a third that of Mastercard (12.20% v 38.4%). Return on equity at American Express is 27.81%, beating Visa's 13.70%, but again some way off Mastercard's 43%. On these fundamentals, Mastercard seems to be the winner, though at a price to earnings multiple of 21.42 its shares would seem to be rated accordingly.
Shares are currently trading near their 52-week high of $53.80 at the time of writing. The shares have been rising through the fourth quarter, though shareholders have seen the trading range narrowing from $43 to $52 to December's range of $46 to $51. The fact that shares are trading at the top of their recent ranges indicates the possibility of a breakout above the 52-week high, though this possibility is yet to be confirmed.
American Express's business strategy is compelling. Expansion to new and growing markets, and a nearly free-to-the-consumer prepaid card promises to make longer-term customers. Decreasing write-off and delinquency rates are good news, as is the company's commitment to digital commerce as consumers increase online spending at the expense of traditional store shopping.
Overall, I have high confidence in American Express shares. With a higher than sector average dividend yield, and a lower than sector average price to earnings ratio, the shares have reasonable value at current price levels. I believe they are a better buy than Visa shares. However, Mastercard's fundamentals appear to be stronger at this stage, and for new investors in the sector, I would recommend them as a better buy.