American Express Company (AXP) is presently in a well-established upward trend that has taken it from around $42 per share a year ago to its 52 week high of $54.17 per share. However, the stock did hit a 52 week low of $41.30 in October of 2011 due to global economic concerns. In addition to this overall positive trend, the company also pays out a dividend of $.72 on an annual basis. This brings in a dividend yield of about 1.4% at the stock's current price, and the dividend is paid out on a consistent basis. The payout ratio is currently 17%, which is much higher than the company's two closest competitors, with Discover Financial Services' (DFS) payout ratio of 5% and Mastercard Incorporated's (MA) payout ratio of only 4%. This does not leave American Express Company with much room to raise the dividend by comparison. Yet, there are many other reasons to invest your money in American Express, which I will discuss below.
American Express Company is categorized as a financial services company with a global outreach. The company's major products are charge cards, credit cards and to a lesser extent, travelers checks. American Express generates more than 50% of its revenue from the merchants in its network in the form of a discount rate charged for each transaction. Another major source of revenue comes from card holders, who pay fees and interest charges on outstanding balances. These charges, however, are presently under intense regulatory scrutiny, and are subject to change in the near term, which could dramatically affect the company's revenue. The losses the company is currently facing under the most recent regulatory legislation are estimated to be anywhere from $0 up to $510 million. I believe this cost will affect American Express Company and its competitors on an even basis.
This level playing field was only recently achieved when American Express successfully sued Visa (V) and MasterCard on anti-trust grounds to allow United States banks to issue American Express cards. In essence, this allows American Express entry into the open loop credit card market while still retaining the competitive advantage it enjoys in its closed loop network. The resulting loss to Visa and MasterCard and gain to American Express is estimated to be in the billions in future growth. The settlement for damages was $2.1 billion from Visa and $1.8 billion from MasterCard. Discover also benefited from the antitrust ruling, with a settlement of $2.8 billion.
American Express Company is the leading issuer of corporate credit cards. The company's average customer spends 2 to 4 times as much as any of its competitor's average customers. The company's network of merchants have the advantage of customers that are going to spend more on average, and this allows American Express to charge a discount rate that is twice as high as its main competitors. (2.5% on average) The combination of big spending cardholders and higher discount rates means the company earns more in revenue per transaction. Higher revenue per customer is also the advantage a merchant enjoys by being part of American Express Company's closed loop network. The net benefit to American Express is that it makes 4 to 8 times as much from the average cardholder than its competitors, but this also limits its growth potential. In my opinion, the company's growth prospects will significantly improve with the victory of the anti-trust suit. American Express Company's closed loop network is currently estimated to make up 80% to 90% of the company's revenue. The company is also shifting away from its travel and entertainment legacy and focusing more on retail and other segments of the market.
Another niche American Express Company has excelled in, and is currently the top player in, is the small business segment. The segment allows small businesses to manage expenses, budget for travel and gain rewards through credit and charge cards as well as other management tools. The company is also taking the concept one step further with its social media marketing campaign. I think this will provide a significant source of goodwill for the company and will also provide its customers with the knowledge to capitalize on this relatively new form of marketing. This will provide American Express Company with a smarter, more loyal and more profitable customer base in this segment in the long run. Whether you are an American Express Company customer or not, you can join the program by first creating an account on LinkedIn and then requesting to be a member of the Social Media Show and Tell at businessknowledgeshare.com.
In addition to its thriving small business segment, American Express Company also operates in five other segments within its charge card division, which include Purple, Gold, Platinum, and Black cards. These color codes represent different levels buying power to the customer, and they are classified by the income of a particular customer and his or her repayment history. American Express Company does not deal with sub-prime or low income costumers, and this reduces the risk overall of losses incurred by non-payment on the account, in my opinion. Credit cards are similar to charge cards differing only in that the customer is allowed to carry a balance, versus a charge card where the balance has to be paid each month. Travelers checks and cards can be used in just about any country in the world through the company's worldwide network. They are popular when traveling, because they reduce the need for currency conversion on a trip, and they are guaranteed to be replaced if they should be lost or stolen.
As for travel services, American Express Company provides members and non-members with a full line of travel services, including flight schedules, car rentals, and hotel bookings, to name a few. I think these services provide an additional competitive advantage. The company has gained expertise in these segments. I believe the company's competitors are trying to emulate these services, but they can't come close to the brand recognition American Express has developed over the years. With that said, I believe American Express has a key competitive advantage over competitors that makes it a solid investment for the long run. I recommend buying shares at their current level.