Warren Buffett, CEO of Berkshire Hathaway (BRK.A -0.39%) (BRK.B -0.56%), has built his legendary investment career by identifying exceptional businesses with durable competitive advantages and consistent long-term returns. His approach has made him one of history's most successful investors through decades of market-beating performance.
Among Berkshire's carefully selected investments, American Express (AXP -0.97%) stands as the second largest position in the holding company's stock portfolio at 15.3%. The financial services giant has earned this position through proven performance, adaptability, and consistent shareholder returns over many years.
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The financial services stock has surged by an eye-popping 62.7% in 2024. Yet American Express still presents compelling value at current levels. Here's why the company deserves serious consideration from dividend growth investors, despite its surging share price in 2024.
Sustained revenue momentum
American Express reported third-quarter 2024 total revenue of $16.6 billion, representing an 8% increase from the same period in 2023. Card member spending grew 6% year over year to $387.3 billion for the quarter. The company's card fee revenue also rose 18% compared with the third quarter of 2023.
Chairman and CEO Stephen J. Squeri attributed this performance to strong customer retention rates in the quarter. He also highlighted the company's success in attracting younger consumers, noting that millennials and Gen Z remain the fastest-growing consumer cohort in the United States. This positive momentum reflects the company's strategy of refreshing its product lineup, with 40 global card updates completed since the beginning of 2024.
Strong earnings and credit quality
American Express demonstrated solid earnings growth in the third quarter of 2024, with net income reaching $2.51 billion, compared with $2.45 billion in the same quarter last year. Earnings per share rose 6% year over year to $3.49, prompting management to raise full-year 2024 guidance to a range of $13.75 to $14.05 per share, from a previous range of $13.30 to $13.80.
The company's credit quality remains strong, with the third-quarter 2024 net writeoff rate improving to 1.9% from 2.1% in the second quarter. This disciplined credit management, combined with revenue growth expectations of approximately 9% for the full year, reflects the company's balanced approach to growth and risk management.
Premium pricing power
American Express's premium positioning is reflected in its pricing strategy. The average fee per card stood at $105 as of the third quarter of 2024, representing a 40% increase from $75 three years ago. This pricing power stems from the company's ability to attract and retain high-spending customers who value premium benefits.
The premium strategy extends beyond consumer cards to the company's commercial segment, which serves high-value business clients. This diverse revenue stream from premium and commercial customers helps maintain strong margin while funding continued investments in card benefits and rewards programs.
Shareholder returns and valuation
American Express's dividend yield stands at 0.92% as of Dec. 6. While that falls below the S&P 500's 1.22% average yield, the company's conservative payout ratio of just 19.8% indicates significant capacity for future increases.
The company has demonstrated its commitment to dividend growth, raising payments by an average of 10.7% annually over the prior 10 years. That's one of the fastest dividend growth rates in the large-cap space. This consistent and above-average dividend growth, combined with a steady stream of share repurchases, shows management's focus on returning capital to shareholders.
Time to buy?
Despite its strong run in 2024, American Express stock trades at only 20 times earnings, representing an attractive discount to the S&P 500's forward multiple of 24. With a proven business model and robust credit metrics, American Express offers investors an opportunity to own one of the financial sector's highest-quality franchises at a reasonable price.
For investors seeking a combination of current value and future growth potential, American Express stands out in today's market. The company's strong execution, pricing power, and focus on premium customers suggest this long-term winner still has room to run.
