American Express: A Continuous Winner in the Finance Sector
Predicting American Express's Position in the Next Five Years
This finance titan, American Express (AXP), has been a prosperous bet for investors since mid-January 2020, offering an impressive total return of 146%. Outperforming the broader S&P 500, AXP has proven it's a stable and winning choice for investors. But will this trend continue in the next five years?
Steady and Predictable Growth
Looking towards 2030, American Express' core operations will likely remain unchanged. It will continue to manage a closed-loop payments network, issue credit cards, and offer a range of banking services to individual and business clients.
Investors can expect a steady growth trajectory from AXP, as its services align with the increasing trend of cashless transactions and growing economic spending. By 2030, the company is likely to increase its active cards in service and payment volume, leading to higher revenue.
Since 2019, AXP has seen a 51% growth in sales. Even if a slowdown is reasonable, Wall Street analysts anticipate a 8% revenue increase in 2025 and 2026. High-single-digit growth seems achievable for the long term.
Partnerships for Enhanced Value
American Express' revenue will also benefit from strategic partnerships with companies like Delta Air Lines, Hilton Hotels, and Uber Technologies. These collaborations incentivize customers to adopt and regularly utilize their Amex cards, boosting the value for cardholders. However, renewal negotiations can be tense in the face of competition.
In 2011, American Express struggled to renew its 16-year partnership with Costco Wholesale. But Amex's target audience of affluent consumers possesses significant purchasing power, which manufacturers and service providers actively pursue to tap into a lucrative revenue source.
Valuation and Returns
Five years ago, AXP shares traded at a P/E ratio of 16. Today, thanks to the stock's impressive performance and high market returns, shares can be bought for less than 22. This 37% increase in valuation is justified given the company's strong financial performance.
However, the stock's current valuation, while elevated compared to five years ago, may not represent a bargain today. The P/E ratio is close to its most expensive level in the past three years.
A bullish market sentiment towards American Express has driven share prices up, even by 100% in the past 15 months. It’s likely that the market has already factored in the prospects of lower interest rates and a robust economic outlook in 2025.
Still, AXP should remain a watchlist contender. Although the valuation is higher than in the past, the quality of its enterprise and robust financial performance support premium pricing compared to traditional banking entities.
Dollar-cost averaging can be a strategic approach for investors aiming to acquire a stake in American Express, reducing the impact of market volatility.
Enrichment Insights
- Prospective Revenue Growth and EPS: Over the next five years, analysts forecast revenue growth of 8% to 10%, with earnings per share (EPS) growing by 12% to 16%. In 2025, EPS is expected to be between $15 and $15.50.
- Strategic Collaborations: American Express has entered into a partnership with Telr, an online payment gateway, to expand its merchant network. It has also refreshed over 40 products globally and acquired Tock and Rooam, strengthening its dining portfolio.
- Valuation and Dividend Yield: With a P/E ratio of 22.63 and a forward P/E ratio of 20.75, American Express commands a premium valuation. Its current dividend yield of 0.9% and a payout ratio of 20% indicate a stable dividend policy. However, with analysts maintaining a neutral view and a price target of $290.25, the stock may decline by 8.45% from its current price.
Given American Express' impressive financial performance and strategic partnerships, investors might consider further investing in the company. The predicted 8% to 10% revenue growth and 12% to 16% EPS increase over the next five years make AXP an appealing prospect. Additionally, the company's premium valuation, while higher than in the past, is supported by its robust financial performance.
