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Willie Keng, CFA

Willie Keng, CFA

Chief Editor

Forget Visa and Mastercard — This is a Better Underdog

Here's why Warren Buffett is still invested in one of America's most prestigious brands, and riding on the payments industry
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How often do you pay with dollar notes these days?

Developed economies have been shifting toward digital payments. Lesser and lesser transactions take place with real cash anymore. One of the many catalysts Covid-19 brought — is the way we pay.

It’s not surprising payment companies like Visa (Ticker: V) and Mastercard Inc (Ticker: MA) are riding on this tailwind.

But forget both companies today.

I like to look the other way.

I found this underdog’s business model still got the ability to remain “top of your wallet” of affluent customers and business travelers. Despite the pandemic.

And you know what’s better?

Its stock has increased dividends over the last 15 out of 20 years. 

And it has not had a single dividend decline.

Fortunately, no one is loving it right now. And it’s this moment you want to be looking at it.

Today, it’s one of the world’s most recognizable financial company… 

Enter American Express (Ticker: AXP).

 

The “Closed-Loop” Network Moat

AXP goes a long way back as a horse-back mail express business, founded in 1850. It used to carry many highly-valued items like gold, jewelry and stock certificates for the wealthy people. 

It earned a reputation for world-class delivery service then.

Unlike Visa, Mastercard counterparts, or JP Morgan (Ticker: JPM), Wells Fargo (Ticker: WFC), Bank of America (Ticker: BAC) banking counterparts, AXP is one unique financial giant. 

Its business model combines both payment and banking solutions under its own “closed loop” network.

Here’s the thing. It not only acts as a payment processor and issues its own credit card, it doubles as a bank. Lending credit to its own pool of customers. 

Because it controls the entire payment value chain in its own ecosystem, AXP makes good money from 3 distinct revenue sources — merchant fees (aka discount revenue), credit card fees and loan income. 

My jaw dropped when I read this. AXP collects about $4 billion of card fees from its customers simply by giving them the right to carry their card. And this amount has been rising each year.

I’ve always thought you could waive off card fees by giving a call to customer service. Doesn’t seem the case. You can check their figures out in their latest SEC filings

This is what we know — Visa and Mastercard target the mass in fee transactions. But AXP works closely with premium merchants and acquire affluent cardholders. Delta Airlines, Marriott, Hilton Holdings, British Airways are one of the many merchant partners with solid relationships.

Even when Costco pulled out as merchant partner in 2015 (and I was glad it happened), it didn’t affect AXP one bit. In fact, the financial giant grew even stronger in 2018 and 2019, topping higher merchant fees of $25 billion and $26 billion respectively. 

 

“Low Capital Costs Creates Massive Cash Flow”

In 2017, Forbes named AXP the 23rd most valuable brand in the world — worth around $24 billion. That’s almost a third of its mighty $80 billion market cap.

But this is what I like about AXP. It still serves the affluent customers and business travelers. Its niche hasn’t changed much since its 1850 mail express business. 

Today, AXP has one of the largest fleet of airport lounges worldwide, including its 7 gold standard Centurion lounges.

All these lead to one thing — its business requires very low capital costs.

The result? Massive free cash flow (FCF) to the company. FCF grew rapidly from $8.4 billion in 2010 to $11.9 billion in 2019. Sales hit $44 billion last year, a 58% growth from $28 billion since 2010. 

AXP spend less than $2 billion on capex each year to grow its business.

And excess cash is used to look after its shareholders — paying more dividends and paying back its own shares. In 2019, it paid out $1.4 billion in dividends and bought back almost $4.7 billion of shares. 

 

“Hidden Growth Spurt”

I like this business. It targets a niche, its unique business model allows it to compete in the digital payment space, even having its own ecosystem. 

AXP moves fast. It expanded collaborations with Amazon with “Pay with points”, plus its currently developing new systems with Paypal and Venmo. 

An aggressor in overseas business. AXP became the first foreign payment network to be licensed to clear local current transactions in China. A strong move for the financial giant.

I think AXP is still a great company. While many investors focus on “pure-play” payment providers, AXP offers a unique edge. 

The pandemic has hit its stock price because of lower business travels. But I think the company is setting itself up for a massive growth spurt once the world recovers from the pandemic.

 

Speak soon.

Always here for you, 

Willie Keng

P.S. I’m glad I bought AXP at $54.60 when it fell in Feb 2016. Costco stopped its partnership with AXP in 2015 then. And caused the price to crash. I did not catch it at the lowest point but I thought a 96% gain over 4+ years is still a decent profit till date. It wasn’t that hard investing, after the stock idea struck me.

Willie Keng, CFA

Willie Keng, CFA is the founder of Dividend Titan, a financial publication for self-managed investors. A former research analyst for top private banks, Willie today runs his own consulting firm. Some of his clients include asset managers and family offices. Willie has a deep passion for helping everyday investors take control of their financial future. And has spent over 10,000 hours researching, analyzing and recommending investment ideas.

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