American Express is an exciting but moderately priced company

American Express (AXP) is an American diversified financial sector company and the fourth-largest payment system in the world.

We rate American Express Hold with a 12-month target price. At $ 145.8, which implies a 7.8% upside potential.

There are 112 million American Express-branded cards in circulation worldwide, and the total annual volume of payments exceeds $ 1 trillion.

Thanks to a strong brand, an extensive and diversified customer base, and an efficient integrated global payment platform, American Express passed the crisis of 2020 with quite reasonable losses.

The global economy to rebound significantly in 2021. Against this backdrop, we should expect an improvement in the travel and entertainment sector, where American Express is firm.

American Express directs significant funds to shareholders through dividends and share repurchases.

Meanwhile, these joyous moments, opinions have already been taken into account in the price of American Express shares, the growth potential of which looks limited at current levels. 

Issuer Description

American Express is an American diversified financial sector company, the fourth largest payment system in the world. He specializes in financial services for travel and tourism, issues credit and debit cards, traveler’s checks. In addition, the company provides payment services to both large corporations and small and medium-sized businesses. As of the end of 2020, there were about 112 million American Express-branded cards in circulation globally, and the total annual volume of transactions in the company’s payment system last year exceeded $ 1 trillion.

The capitalization of American Express is about $ 109 billion. The large principal shareholders are:

• Warren Buffett’s Berkshire Hathaway (18.83%) and the Vanguard Group funds (5.91%).
• Wellington Management (4.59%).
• State Street Global Advisors (4.11%).
• BlackRock Institutional Trust (3.56%).

American Express operates in three main segments. First, the Global Consumer Services Group produces a wide range of proprietary consumer cards that allow citizens of different countries to travel worldwide. At the same time, American Express cardholders have the opportunity to receive additional services related to travel, including insurance, booking air tickets, hotel rooms, and tables in restaurants, etc.

American Express issues card independently and in partnership with other companies such as Delta Air Lines, Marriott International, British Airways, Hilton Worldwide Holdings. By paying with these cards, their holders receive particular points, which can then use to purchase products and services of the respective companies.

The Global Commercial Services segment provides branded corporate cards, payment and expense management services, and commercial finance products. Finally, the Global Merchant and Network Services Segment operate a global payments network that processes and settles card transactions and interacts with merchants worldwide. In addition, it provides multi-channel marketing programs and capabilities, services, and data analytics.

The Global Consumer and Global Commercial segments generate 46% and 40% of the total transaction volume in the American Express payment system. Geographically, the United States accounts for more than two-thirds (69%) of all payments.

American Express has partnered with Chinese fintech company Lianlian DigiTech for this purpose in a joint venture called Express, which will settle payments in local currency within China through its payment network, which began operating later last year. In addition, Express plans to work with banks running in China to issue cards under the American Express brand that can use for payments in yuan.

The NBK approval was “an important step forward” in American Express’s long-term growth strategy, said CEO Stephen Square.

Financial results

American Express recently released its results for the fourth quarter of 2020, summing up the results of a very difficult “coronavirus” year for the entire global economy. Net income in October – December decreased to $ 1.42 million, or $ 1.76 per share, against a profit of $ 1.66 billion, or $ 2.03 per share, in the same period last year. At the same time, the EPS indicator significantly exceeded the average forecast of Wall Street analysts at $ 1.35.

American Express’s quarterly net revenue fell 17.7% year-on-year to $ 9.35 billion amid the weak global business and consumer activity due to the coronavirus pandemic. However, it was roughly in line with the consensus forecast.

The total volume of transactions in the company’s payment system decreased by 14.7% to $ 277.5 billion, including a 65% drop in the travel and entertainment segment. Retail banking revenue fell 13.6% to $ 5.53 billion amid a decline in consumer spending on cards; divisions for servicing legal entities – by 20.4%, to $ 2.73 billion. Revenues in the segment of processing services and servicing financial transactions fell by 21%, to $ 1.24 billion.

Net interest income fell 16.9% to $ 1.90 billion on lower card loans, although net interest margin remained unchanged at 10.7%. Operating expenses decreased 9% to $ 7.60 billion.

An additional factor decrease in profits, in addition to a significant reduction in revenue, was the increased effective tax rate – to 22.6%, from 14.8% in Q4 2019. In the meantime, the profit release of provisions for possible loan losses for $ 674 mln was due to improved forecasts for the outlook for the global economy.

The volume of assets of American Express at the end of the IV quarter amounted to $ 191 billion, decreasing by 3.5% in annual terms. The importance of issued loans on cards fell by 20%, to $ 68 billion, and the volume of deposits increased by 19.2%, to $ 87 billion. As of the end of the reporting period, the total volume of provisions covering possible losses on loans amounted to $ 5.34 billion, or 7.3% of all loans issued, against $ 2.38 billion, or 2.7%, at the end of last year’s quarter. However, the indicator has decreased compared to 8.2% at the end of the third quarter.

The Tier 1 Capital Ratio was at a pretty high level of 13.5%, up markedly from 10.7% last year.

In the reporting period, the company returned about $ 350 million to shareholders through dividend payments.

Overall, we can say that American Express passed the crisis year 2020 with moderate losses, fueled by a strong brand, an extensive and diversified customer base, and an efficient integrated global payment platform. 

The measures to support employees allowed the company to retain its staff and launch several loyalty programs – to a large extent to maintain customers, both in the consumer and corporate segments, especially in small and medium-sized businesses. Moreover, the retirement rate among American Express card users decreased last year relative to 2019, while their level of satisfaction with the company’s services and products, according to surveys, on the contrary, increased.

 Against this background, the volume of payments in the company’s system demonstrates steady growth after reaching a minimum in April. Moreover, in the segments not related to travel and entertainment, it exceeded the pre-crisis level in the third and fourth quarters.

Note that American Express continued to actively invest in developing its payment network, which should allow the company to show a rapid recovery from the crisis. For example, in the United States, the company managed to achieve parity with Visa and MasterCard in the number of outlets where American Express cards are accepted. In addition, outside the United States, the number of points you can pay with American Express cards increased by 3.7 million over the past year. 

The company continues to expand into segments not directly related to the card business. In particular, last year, acquired the financial and technological firm Kabbage, which is engaged in lending to small businesses. The deal to enable American Express “to offer a broader range of cash and working capital management tools to millions of US small business customers.”

American Express’s current financial position is not worrying. Capital adequacy ratio CET1 at 13.5% significantly exceeds the regulatory minimum of 10%. Moreover, the volume of cash and short-term investments on the company’s balance sheet at the end of last year reached $ 54.6 billion, becoming the highest since the beginning of the pandemic. Against this background, the company intends to continue the practice of significant payments to shareholders.

The current 2021 to be a watershed year for the global economy. According to the IMF, global GDP will grow by 5.5% after falling by 3.5% in 2020. will be facilitated by the expansion of vaccination against coronavirus, which will gradually return economic life in the world to normal and restore consumer and business activity and super-soft monetary and fiscal policies in leading countries.

Against this background, we should expect an improvement in the travel and entertainment sector situation, where the positions of American Express are extreme. Due to the COVID-19 pandemic, citizens of leading countries have to spend too much time at home, and they are likely to take the opportunity to travel the epidemiological situation allows. Therefore, the prospects for business tourism are also looking good.

More than 60% of companies plan to send their employees on business trips this year, according to a Global Business Travel Association survey.

American Express expects that the company’s payment volume related to travel and entertainment will recover to 70% of the pre-crisis level by the end of this year; this will increase revenue by 9-10% in 2021. further release of provisions for possible loan losses, which will support profit indicators.

Payments to shareholders

American Express has seen steady growth in dividend payments in recent years. The company currently pays out 43 cents per share in dividend quarterly or $ 1.72 per annum. At the same time, the dividend yield of American Express securities is about 1.3%, which is noticeably higher than that of competing payment systems Visa and MasterCard.

In addition, American Express invests heavily in buybacks. At the end of 2019, $ 4.7 billion for these purposes (including dividends, total payments to shareholders exceeded $ 6 billion). In 2020, the buyback volume was only $ 1 billion because the Fed imposed a ban on the buyback of shares by financial companies in connection with the need to save capital in the middle of the year. 

Meanwhile, after conducting another round of stress tests at the end of December, the regulator said that American financial companies could resume the implementation of share buyback programs in the first quarter of 2021, albeit with some restrictions. As a result, American Express plans to spend $ 440 million on buyback in January – March.

Evaluation

We have valued American Express using the comparative method based on our forecasted financial results for 2021. Our estimate is the arithmetic mean of our P / E and P / BV multiples.

We estimate the fair value of American Express at $ 117.4bn, or $ 145.8 per common share, over a 12-month horizon. The upside potential is 7.8%, the recommendation is “Hold.”