Dow-30 component American Express (AXP – Free Value Line Research Report on American Express) is a household name. It traces its roots back to 1850 and provides financial and travel services to a generally wealthy client base. The business is broken into two parts, the Global Consumer Group and the Global Business to Business Group. (All of this information can be found in the Business Description section of the Value Line report.)
The iconic green card and global recognition, however, didn't protect American Express from the depths of the 2007 to 2009 recession. That recession was both deep and long, and was driven by the severe strains on the financial system. Anything and everything related to finance came under the market's microscope. In fact, American Express stock fell from a high of nearly $66 per share in 2007 to a low of just below $10 in early 2009. (The high and low price for a given year is presented above the Graph.)
Although there were real issues with regard to American Express' business weakening, this was a case of throwing the baby out with the bathwater. True, some of the company's customers were defaulting on their credit card debts, but even during the worst of the recession American Express remained profitable. Moreover, unlike many other financial companies, banks and real estate investment trusts, in particular, American Express never cut its dividend.
Just a few short months after hitting its low, the share price was on the mend. By the end of 2009 it had reached $42, and has more recently hovered around $60. American Express was trading at $10 at the time and paying a $0.72 per share annual dividend. This can be seen in the historical portion of the Statistical Array, and equated to a 7.2% dividend yield. Owning American Express with a 7% dividend would likely be an income investor’s dream come true; particularly now that the company has begun increasing the distribution again. The disbursement has gone from the annualized $0.72 that it had held firm at between 2008 and the first quarter of this year, to an annualized payout of $0.80 per share, as shown in the Quarterly Dividend box. (For those inclined to dream, that would create a yield on purchase of 8% for anyone who bought in at $10 per share.)
It would have taken a great deal of fortitude to step in to buy American Express when the shares were in a virtual free fall. However, this story helps explain why having a wish list or a watch list is so important.
American Express has always been an odd duck in the financial arena. Prior to November 2008, it was a corporation, not a bank. Its business centered around issuing credit cards and similar instruments (the famous Traveler's Checks, for example) to relatively wealthy clients. This separated it from the credit card companies, like VISA (V) and Mastercard (MA), because it wasn't just in the business of processing transactions—it actually issued the cards and shouldered the risks inherent in that business.
American Express, however, wasn't quite like a card issuer either, like banks. Most card issuing companies shoulder the risks inherent in the credit card business, while trying to get as many customers as possible. In fact, prior to the recession, that acquisition effort was pretty indiscriminate. American Express has stuck pretty close to its high-end core throughout its existence. While that clearly doesn't insulate it entirely from problems, it provides some offset when problems do occur. Remember, the company never lost money during the recession. Earnings took a hit, falling from $3.39 per share in 2007 to $1.54 in 2009 (found in the historical portion of the Statistical Array), but there was no red ink.
So, the company's unique business model is one differentiating reason for investors to put American Express on their watch list. Another advantage is the company's financial strength. Although the company decided to convert to a bank in November of 2007 for strategic reasons (which is clearly marked on the Graph by a bold black vertical line), its business model never changed. So, its strong finances are also a hallmark.
On that front, it currently earns an A++ Financial Strength rating, found in the Ratings box and only dropped to a B++ (a still solid score) during the worst of the recession. The company's Safety Rank, meanwhile, dropped during the recession to Average (3) but was increased to Above Average (2) in the middle of 2011. This proprietary Value Line metric can be found in the Ranks box. Clearly, the company’s finances were stressed during the recession, but not to the extent of some competitors, which are still reeling from the pain incurred during the period.
Even though the shares have risen dramatically from the lows, Value Line's Ian Gendler states that, "We continue to like this Dow component as a long-term holding." That may not hold true for an investor looking for a substantial dividend, since the recent 1.3% dividend yield isn't overly compelling. Still, the market can be quite fickle, so long-term investors looking for a higher yield should probably keep this financially strong and uniquely focused company on their radar. You never know when it might be put in the bargain bin again.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.