Sometimes not a first thought for beginner and retail investors, it´s certainly worth thinking about this banking giant when considering your portfolio diversification strategy. American Express, founded in 1850, has evolved from an express mail business into one of the world’s leading integrated payments companies. With a global presence in over 130 countries, Amex offers credit cards, charge cards, and travel-related services to consumers and businesses.
Over the past decade, American Express has demonstrated steady financial growth. Revenue increased from $30 billion in 2010 to $67.4 billion in 2023, a 124% increase. Net income grew from around $5.9 billion in 2018 to $9 billion in 2022. Amex’s stock price has also performed well, rising from around $90 in 2014 to over $246 in September 2024, a 173% increase*.
Resilience in Economic Downturns
American Express has proven more resilient than many banks during past recessions. In the 2008 financial crisis, while many financial institutions struggled, Amex maintained profitability each year[8]. In the Federal Reserve’s 2024 stress test simulating a severe recession, Amex was projected to generate over $5 billion in pre-tax profit, the second highest of the 33 banks tested..
Several factors contribute to Amex’s economic resilience:
- Affluent customer base: Amex focuses on high-earning consumers who are less impacted by economic headwinds. The average Amex cardholder has an annual household income 27% higher than non-cardholders.
- Spend-centric model: Amex earns most of its revenue from transaction fees when cards are used, rather than interest on balances. This model performs well when consumer spending remains high.
- Diversified business: Beyond consumer cards, Amex has strong corporate card and travel services businesses that provide revenue diversity. Over one-third of borrowings are from charge cards which have lower default risk.
The Amex Advantage
Amex’s business model and brand positioning provide unique strengths:
- Premium brand: The Amex brand is associated with prestige and high-end perks, attracting high-spending consumers. Amex cards have no pre-set spending limits, enabling higher transaction volumes.
- Loyal customers: 87% of Amex cardholders are enrolled in loyalty programs and 65% would choose a merchant that accepts Amex over one that doesn’t. This “spend-centric” model drives Amex’s revenue.
- Valuable customers for merchants: Amex cardholders spend 43% more on average than non-cardholders. While Amex’s merchant fees are higher than Visa/Mastercard, many businesses find the high-spending loyal customer base worth the costs.
Risks and Outlook
Potential risks for Amex include increased competition in the premium card space, regulations that could impact revenue from fees, and a severe recession dampening consumer spending.
However, Amex’s strong financial position, unique business model, and growth initiatives provide reasons for optimism. Expansion in international markets and younger consumers could drive long-term growth.
While economic uncertainty remains, American Express’s resilient business model and loyal, high-spending customer base make it an attractive opportunity for long-term investors. As CEO Stephen Squeri recently stated, Amex has “surpassed initial expectations on its journey” and appears well-positioned to weather economic storms ahead.
Diversification is the key to success
Those who are new to investing and business often pile their hopes on the high growth, high volatility tech stocks but it´s my view that a fundamental importance for a long term investor is to have a diverse portfolio. That means investing your money in multiple sectors that operate as independently from each other as possible. It also means thinking about the countries that your are investing in and whilst American Express is a USA based company, it´s operations around the world mean that it´s income sources are truly global. So to invest in a bank with such a strong proven track record that is present around the world and who´s customers are amongst the most affluent and low-risk is, for me a very worthwhile consideration when building a portfolio.
Remember, that anything contained in this article is based on personal opinion and not intended to be, nor should be taken as investment advice. Past performance of any company does not necessarily ensure future performance and any investment can go down as well as up in value. Always look at your long term strategy, risk tolerance level and overall investment goals, using a wide range of data and opinions.
*Financial figures from various sources and estimated.
