In recent quarters, Warren Buffett and his team at Berkshire Hathaway (BRK.A -0.39%) (BRK.B -0.56%) have made headlines by consistently selling more stock than they bought. Buffett's decisions to unload significant fractions of his Apple and Bank of America positions, among others, have sparked much speculation about how the Oracle of Omaha views the market's current lofty valuations.
According to Berkshire's 13-F filing with the Securities and Exchange Commission for the third quarter, the conglomerate sold more than 235 million shares of Bank of America stock. The megabank has been a part of its portfolio since 2011, but those sales dropped it to Berkshire's third-largest stock holding
That leaves American Express (AXP -0.97%) in second place. Berkshire has held American Express for three decades now, and it will likely remain a core holding in its portfolio over the long term. Here's why.
Why Buffett likes American Express
American Express's business history stretches back 174 years, but it didn't enter the credit card market until the 1950s. Under the leadership of then-CEO Ralph Reed, the company strategically positioned its card as a premium offering by setting its annual fee $1 higher than that of rival Diner's Club.
Over the years, American Express's strong brand has attracted a high-spending, premium customer base. One prime example of its high-end brand strategy is its invite-only Black Card, which reportedly requires $250,000 in annual spending and has an annual fee of $5,000.
It also offers a more affordable (but still pricey) Platinum Card with an annual fee of $695. That card is meant to appeal to high-spending consumers with benefits that include access to airport lounges, hotel perks, travel rewards, and spending credits for dining and entertainment.
Image source: Getty Images.
This strong brand is why Buffett and his right-hand man, the late Charlie Munger, purchased American Express stock in the 1990s, and why it has remained in the portfolio ever since, making it one of Berkshire's longest-held positions.
When Stephen Squeri took the reins of American Express as CEO in 2018, Buffett reminded him: "The most important thing about American Express is the brand and the customers that aspire to be associated with the brand."
American Express's business model
With $1.1 trillion in U.S. transaction volume in 2023, American Express is the third-most-used card brand behind Visa and Mastercard. However, there is a distinct difference between it and its two larger peers.
Visa and Mastercard operate as open-loop payment networks while American Express operates a closed-loop system. In other words, Visa and Mastercard operate as intermediaries between card-issuing banks and merchants. They earn fees on the transactions facilitated by their networks, which they share with issuing banks.
By contrast, American Express processes transactions, but also lends money directly to its credit card customers, enabling it to generate interest income as well as processing fees. While this opens up American Express to credit risk if customers default, it also benefits from rising interest rates. From 2021 to 2023, American Express's net interest income increased by $5.4 billion, or 69%.
AXP Net Interest Income (TTM) data by YCharts.
That credit risk means investors should pay attention to how U.S. consumers are feeling financially when assessing the outlook for American Express. In the third quarter, it had a net write-off rate of 2.6% of its credit card member loans. While this metric has risen gradually in recent years, a big reason is that credit conditions have been normalizing in the years since the pandemic.
Because of the credit risk it carries, American Express regularly trades at a discount to Visa and Mastercard, which investors should be aware of if they're evaluating stocks based on valuation. However, its premium customer base has helped it ride out tough economic times better than other financial institutions that hold significant credit card loan balances.
AXP PE Ratio data by YCharts.
A quality stock for long-term investors
American Express has been a cornerstone of Berkshire Hathaway's portfolio for three decades, thanks to its strong brand and solid business model. The company is well-positioned to grow in an expanding economy with strong consumer spending, and it also performs well during times of inflation, which are associated with higher interest rates.
While credit risk is a concern, its premium customer base can better ride out economic storms, making American Express an excellent stock that investors can confidently hold for the long haul.
