Berkshire Hathaway’s asset composition has significantly evolved in recent years, with the value of its controlled companies now surpassing its public equity portfolio. In addition, its cash, cash equivalents, and marketable securities also hold greater value than its stock holdings.
Berkshire has decreased its stakes in major holdings like Apple and Bank of America. However, its position in American Express, which has remained consistent for decades, now constitutes 14.5% of its equity portfolio, making it the second-largest holding after Apple. Despite American Express’s long-term market success, it is currently underperforming compared to the S&P 500 and Nasdaq Composite.
The report highlights reasons investors might consider purchasing this dividend-paying value stock. American Express operates with a unique business model compared to pure-payment processors like Visa and Mastercard, which are partnered with banks to issue cards and only assume low risk by collecting fees based on card usage volume and frequency. In contrast, American Express issues its own cards and assumes the associated risk but mitigates this by targeting affluent customers who are generally resilient to economic shifts. It also functions as a bank by offering various financial products, leading to potential higher growth when managed well.
American Express aims to integrate high-quality, financially stable customers and maximize their spending, offsetting high fees through higher annual charges and attractive rewards. Over the years, American Express has consistently grown its revenue and earnings, particularly in the post-pandemic period as it appeals to younger demographics like Gen Z and millennials.
Given this performance, some investors question why American Express stock has depreciated so significantly this year. The decline could partially be attributed to its exposure to affluent clients who might limit spending during economic downturns, especially if asset values drop rapidly. Despite this decline, the stock’s valuation remains historically attractive, with the price-to-earnings ratio below the five-year median average, indicating potential value.
American Express’s long-standing buyback efforts have significantly increased Berkshire’s stake in the company, illustrating how buybacks can enhance shareholder value by reducing the share count and thus increasing earnings per share. Over the past decade, American Express has cut its share count by 30%, and recently announced a 17% dividend increase, raising the quarterly payout to $0.82 per share.
The company is noted for its solid financial standing and ability to return capital through buybacks rather than dividends, which explains its relatively low yield.
Overall, American Express demonstrates the power of quality over quantity in the payments sector. Although it issues fewer cards than competitors Visa and Mastercard, the loyalty and spending power of its customers result in higher average spending per card. With strategic expansion appealing to multiple age groups and its current valuation, American Express is considered a strong investment opportunity amid the broader market decline.
