Company Profile: American Express
I have been talking a lot about the Dow Jones lately, so I decided to profile a Dow company this week – American Express Company (American Express). It has been on the Dow Jones list of 30 stocks since 1982! The Dow Jones Industrial Average, as you will recall from earlier posts, is an average of the top 30 largest companies in the US. I won’t get into the details of how the DJIA is calculated as you can find that under the post Dow Dividend Strategy. I have not profiled a Dow company on the site yet. So, I thought American Express would be a good one to analyze and see how the numbers compare to some of the newer, less established companies we have discussed previously.
The fact American Express has been on the DJIA for that long gives you a sense just how big this company is and its history. I have had an American Express card for approximately 10 years and while the yearly fee can be higher than other cards, in our case, the additional airline travel points we receive from using the card make up that difference. Plus the American Express airport lounges are pretty awesome (well, I have only been in the Las Vegas one but it was impressive). I understand a new one is opening up soon at JFK airport.
· As stated many times on this site, I, nor ZSM Creative Inc. operating as The Capital Pink, are financial advisors and have no financial accreditations. I am applying some basic evaluation tools to this stock along with some commentary but this should only serve as a starter for your further research. The information below is only current to the day this post was written which may or may not be the same day as this post was published so please update the ratios and numbers to the current day before relying on them as they may have significantly changed (see How Do I Evaluate a Stock? (Part One) for information on where to find the ratios and numbers online). Please read my Legal Disclaimer. Also, I do not own American Express stock and am not affiliated with them in any manner.
What is American Express?
As you all know, American Express is a credit card company. It is the world’s largest card issuer by purchase volume. In addition to a credit card company, it provides commercial payment tools to businesses, offers marketing and information to help merchants in running their businesses and also operates one of the world’s largest travel networks.
American Express began doing business on March 28, 1850 as an express mail service and was first listed on the NYSE on May 18, 1977. Around the early 1900's, it transitioned into a financial services company. Many will recall its famous Travelers Cheques that changed the way people travelled with their spending money. Berkshire Hathaway (Warren Buffett’s company) is the largest institutional investor in American Express. An institutional investor is not an individual person like you or I that decides to purchase a small amount of stocks in a company. An institutional investor is an entity which pools its money together to purchase the securities for a larger group purpose. For example, a government pension fund has people in charge that make buying decisions to purchase large amounts of stock for the benefit of the pension fund. Another example is a mutual fund that may buy a large amount of a stock for the benefit of the mutual fund. Given these large investors have so much clout, companies are quick to please these types of investors. One last fact, in 1972, American Express shares traded at $1.26 and now, in 2018, 46 years later, they are around $100. Huge growth!
What is American Express’ stock doing?
As at January 29, 2018, the numbers from our basic stock evaluation tools are as follows:
Share price: $99.93 USD
One share of American Express would cost you $99.93 USD. The price over the past 52 weeks has ranged from $75.51 to $102.39 USD. It is interesting to compare prices to say Constellation Brands (the liquor company profiled a few weeks ago) as that traded at over $200. Interesting given American Express is such a tried and true company but at the same time, its large growth days may be over whereas Constellation Brands may not be. In any event, the discrepancy is interesting.
Price to Earnings (P/E): 19.20
Recall this is the stock price divided by the earnings per share. If the P/E is high, you should expect to get some growth for having paid a bit more for the stock however, it could indicate the stock is overvalued. The index according to Morningstar is 22.47 so American Express is close to this figure. The index in question is the S&P 500 which is an index of the largest 500 US companies.
To put the P/E figure into perspective, the market is giving American Express a value equal to 19 years of its earnings. The 5-yr average P/E for American Express is 15.54.
Dividend Yield: 1.34%
Dividend paying stocks are something many investors look to buy as they are like an interest rate on your shares. Dividend payouts are discretionary. Dividend yield represents the amount the company pays out in dividends relative to its share price. While a higher dividend yield is usually more desirable, you still need to consider the health of the underlying company before making a generalization either way.
Earnings per Share (EPS): $5.19 TTM (Diluted – which takes into account any extra shares) (Trailing Twelve Months, takes the numbers for the past twelve months to come to this figure)
This figure will tell you a great deal about the growth of the company. It takes what the company earns and divides it by the number of shares outstanding. It is essentially the profit allocated to each share of the company. The bigger the number the better because the more the company earns, the more attractive it is to investors. EPS that is increasing every quarter shows earnings momentum and shows growth potential. American Express’ EPS has had a 5 year growth of 0.07% so basically has stayed the same.
Revenue: $32.65 Billion
Increasing revenue is a good sign that the company is growing. American Express’ 5-year average is at $32.87 billion so it has stayed constant with a growth of 1.40%. This is not surprising in an older, well established company. It may not have tons of growth left in it unless new markets or something else is added to add to the revenue base
Return on Equity (ROE): 22.04%
ROE tells you what sort of return the company is getting on the shareholders money. An increasing ROE is a good sign. American Express has a 5-year ROE of 25.66% so again, staying fairly constant.
Market Capitalization: $85.8055 Billion
American Express, like all Dow companies are huge, large cap stocks. Recall that small cap stocks usually have the most room for growth as opposed to large, established, stable large cap companies.
Net Profit Margin: 14.21% TTM (Trailing Twelve Months)
This ratio tells us what profit is left over after the company pays its expenses for the year. The more money it keeps, the better. High net profit margins mean that a company is good at keeping profit after expenses are paid, which may mean they are adept at keeping their expenses down. It is a good idea to compare these over an industry to see what companies are good at operating and maintaining a high net profit margin. Here, the index is 14.36% so American Express is right on the index.
Cash Flow per Share: 6.93 (end of 2016)
Recall that this number is the cash flow through the business divided by the number of shares outstanding. It represents the net cash a company can produce per share and many investors consider this a better indicator of a company’s health than the more popular, earnings per share ratio because it is more difficult to manipulate cash flow numbers than it is earnings numbers. A higher value usually indicates the company is in a healthier position.
This ratio should be considered along with the EPS figure for a better picture of the company’s health as there should not be a wide discrepancy between the two figures. If there are large variances between those numbers, you may want to consider if there were large, non-recurring one-time items that account for the large variance. It is also wise to look at a company’s cash flow picture in the long term as that should take into account one-time, large capital expenditures (money spent by a company to buy or maintain an asset like land, buildings or equipment, i.e. “fixed assets”) that required large amounts of cash.
Price to Sales (P/S): 2.74
This ratio compares the total market value of the company with its sales revenues. There is not a great deal of manipulation a company can do with its sales data so this can be a good indicator of how well the company is doing. Recall that a lower ratio relative to its peers in the industry can indicate a potentially good investment opportunity. Morningstar indicates the index is 2.10 so it is very close. Morningstar has changed its site so I don’t have the industry comparisons at this point but I understand those ratios will be back soon on the site.
Price to Book (P/B): 4.06
This compares the stock price with how much the stock would be worth if the company was liquidated or sold off. It is the value of the stock in comparison to the underlying assets of the company. Thus, a low P/B relative to the stock price suggests you are not paying too much for what would be left over after such a sell off. The index P/B is 3.04.
Price to Cash Flow (P/CF): 7.51
Having cash left over after expenses are paid off is crucial to remaining in business so this is a good indicator about the health of a company. Generally lower is better as it could indicate the company is obtaining large cash flows not yet reflected in the stock price. Morningstar indicates the index is 13.84 so American Express is considerably lower than the index on this metric.
This completes a basic evaluation of American Express. As always, there are tons of articles and discussions online about this stock and all stocks so they are also a good place to look at for further consideration. It is interesting to perform the above analysis on a company like American Express which is so well established and has been around for so long. As you can see, most of the figures are very close to the index figures which makes sense. A Dow company like this is not going to have wild swings one way or the other like some of the other smaller, more growth-oriented companies we have looked at previously.
** Top photo courtesy of Pixabay on Pexels