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Is This Top Warren Buffett Stock a Buy Now?

Barchart - Fri Feb 23, 10:21AM CST

Warren Buffett is an iconic figure in the finance realm. Buffett's holding company, Berkshire Hathaway (BRK.B), has focused its investment strategy on identifying undervalued companies and holding them for the long term. This strategy has become a model for aspiring investors.

One such stock that has earned a place in Buffett's equity portfolio is American Express Company (AXP), also known as AmEx. The company has been a long-standing player in the global financial industry. American Express accounts for 8.8% of Berkshire's holdings - just behind Apple (AAPL) and Bank of America (BAC), and ahead of Coca-Cola (KO).

Over the past 10 years, AXP has returned 136%, and AmEx shares have gained 15.3% year-to-date, compared to the S&P 500 Index’s ($SPX) gain of 7.4%. Let’s find out if AmEx is a good buy now.

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American Express Has a Unique Business Model 

Founded in 1850, American Express has a rich history as a global financial services provider. Since then, the company has adapted to the changing dynamics of the financial industry.

American Express has developed a strong brand identity that has helped it attract a diverse customer base, including high-net-worth individuals and businesses. AmEx is known for its premium card offerings, including the iconic Green, Gold, and Platinum cards - which have garnered a loyal customer base seeking not just financial transactions, but a premium experience. This has allowed the company to maintain its robust fundamentals.

AmEx’s Growth Plan Proved to Be A Success

In its recently reported fourth quarter, total revenue (net of interest expense) at American Express increased 11% year-over-year to $15.8 billion. Diluted earnings per share (EPS) grew 27% to $2.62. For the full year, revenue and earnings jumped 14% each, as AmEx added 12.2 million proprietary card members.

AmEx announced a growth plan in January 2022, which it believes is yielding results. Since the plan went into effect, AmEx's revenue has increased by more than 40%. Management believes that these results are due to the company's premium customer base and the strength of its business model.

Furthermore, the company's business model relies on a closed-loop network. In other words, in addition to issuing cards directly, AmEx also processes the payments. This model enables it to maintain a direct relationship with cardholders, while also analyzing their spending habits and providing personalized services accordingly.

AmEx Hikes Its Dividend

AmEx is also a dividend-paying stock with a 1.12% yield, slightly lower than the sector average of 3.1%. However, its forward payout ratio of 16.2% indicates that these dividend payments are sustainable, with room for growth.

The company also announced a 17% quarterly dividend increase in the fourth quarter, to $0.70 per share, payable in the first quarter of 2024. AmEx ended the quarter with $47 billion in cash and cash equivalents. While the company's debt-to-equity ratio is high at 1.71, its interest coverage ratio of 6.3 indicates that AXP's earnings easily cover the debt interest payments.

Management believes that while the spending environment was soft in 2023 due to rising interest rates, cardmembers' loyalty across the globe will continue to boost its performance.

Looking ahead, management foresees revenue growth of 9% to 11% for the full year, while earnings are projected to grow by 13% to 17% for fiscal 2024. Analysts forecast revenue and earnings growth of 9% and 13%, respectively, for 2024.

What Do Analysts Say About AXP Stock?

Overall, analysts have pegged American Express stock as a “moderate buy.” Out of the 25 analysts that cover the stock, 11 rate it a “strong buy,” two recommend a “moderate buy,” 10 suggest a "hold,” and two rate it a “strong sell.” AXP stock has surpassed the Street's average target price of $203.20, but the high target of $240 indicates a potential upside of 11.6% from current levels.

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The Bottom Line on American Express Stock

Despite the macroeconomic volatility, American Express has maintained the strength of its business, and continues to grow revenue and earnings. AmEx remains focused on its long-term goal of achieving annual revenue growth of 10% or higher, while maintaining EPS growth in the mid-teens.

With a solid foundation, a distinct business model, brand strength, and the ability to adapt and innovate, the company still has a long way to go. I believe American Express is a good long-term investment, and it is not surprising that the stock has earned a place in Warren Buffett's portfolio. 

On the date of publication, Sushree Mohanty did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.

Provided Content: Content provided by Barchart. The Globe and Mail was not involved, and material was not reviewed prior to publication.

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