It has been difficult to beat the returns of the S&P 500 in the last five years. More so if you didn't own any of the "Magnificent Seven" technology giants.
A stock that has bucked this narrative is American Express (AXP -0.97%), which has produced a total return of 160% over the last five years, most of which has come in the last 12 months. The S&P 500 total return is 106% over that same time period.
Reinvigorating its growth model by sharpening its focus on travel and entertainment, American Express is gaining share in the United States and key markets internationally, helping the credit card giant grow earnings.
What do the next five years hold for American Express shareholders? I think it will look a lot like the last five. Here's why the stock is an easy buy and hold for your portfolio today.
A blessing in disguise
In 2015, Costco Wholesale and American Express decided to end their credit card partnership. With 1 in 10 American Express cards under this deal, investors were concerned when Costco ditched its long-term partner, sending American Express stock downward. The business struggled to grow for the next few years as it digested the partnership's termination.
However, over the long term this has been a blessing in disguise for American Express. Costco -- with its huge negotiating leverage -- did not give American Express very good unit economics on the deal, meaning it made up a small portion of its profits. It also allowed American Express to refocus on what gives it a premium brand in credit cards: travel perks.
When current CEO Stephen Squeri got the job in 2018, he decided American Express needed to reinvest in travel and entertainment perks for its members. This includes partnerships for co-branded credit cards as well as perks that cardmembers can use when traveling and eating out at restaurants. It doubled down on its airport lounges, which provided an extra perk for credit card holders and further increased its brand status within the travel sector.
In 2024, this strategy shift has paid dividends -- literally and figuratively. In the past 10 years, American Express' earnings per share (EPS) is up close to 150%. The company is now adding over 3 million new card accounts every quarter, with overall cards in circulation finally growing in the last five years after stagnating just above 100 million in the 10 years prior.
Driving growth internationally
American Express has been a mainstay in credit cards in its home market. I would expect this to remain over the next five years, with perhaps small market share gains due to its fast growth among Gen Z and millennial customers. The market is not ripe for rapid revenue growth in card spending, though.
Where American Express sees even more opportunity is international markets. It already has a strong foothold in Mexico, Japan, and Australia, but there are plenty of other countries it can target. There is generally always a portion of a country attracted to this premium travel credit card. Management wants to increase credit card perks and merchant acceptance in new markets, which it is making good progress in. International locations accepting American Express cards grew by 50% from 2021 to 2023.
The beauty of American Express' international expansion is the reinforcement it gives to its customer value proposition for United States customers. For example, let's say American Express doubles its merchant acceptance in Mexico, adds more airport lounges in Mexico, and gives out more Mexico-related perks for its cardholders. Any American traveling to Mexico can take advantage of these benefits.
This flywheel will be the key to American Express continuing its growth in the coming years. Management expects revenue to grow at a 10% annual rate. If the company is going to hit this hurdle, the international business will need to keep expanding.
AXP PE Ratio data by YCharts
Where will American Express stock be in five years?
There is plenty of room for American Express to grow over the next five years. Market share gains, international growth, and pricing power can help the company maintain a 10% revenue growth rate over the long term. With operating leverage and the addition of share repurchases, management expects EPS to grow at a 15% annual rate. Don't forget the annual 1% dividend yield, either.
Today, American Express trades at a price-to-earnings ratio (P/E) of 22. This earnings multiple has expanded in the last year but still remains at a comfortable level, at least compared to the S&P 500, which has a P/E over 30. I believe a good brand like American Express deserves to trade at a P/E of 22, if not higher.
Taking this into account, it feels reasonable to expect American Express stock to grow alongside its EPS growth. If American Express can grow earnings at 15% per year, that is around a double for shareholders who hold over the next five years, making the stock a good choice for buy-and-hold investors today.
