It’s not often that Dow stocks experience significant price fluctuations, given their general tendency to be among the most stable equities out there. That’s not to say they are entirely immune to price swings, whether driven by news or company-specific events. In fact, such has been the case lately for diversified financial services titan American Express (AXP - Free American Express Stock Report). The issue slipped recently, much to the chagrin of shareholders, after the company made headlines regarding a couple of its major partnership deals. Yet, although the latest share-price decline has made American Express less attractive than many of its blue-chip brethren, we wouldn’t necessarily dismiss this venerable Dow member. For those looking to size up an opportunity to jump on board, this is where a Value Line report comes in handy.
First, however, a brief synopsis of the company’s background may be in order. American Express got its start back in 1850, when it was originally founded as an express service provider that delivered parcels and valuables across the country. After a century and a half of expanding and eventually streamlining its business, American Express (following the conversion in 2008 from a corporation to a bank holding company) is better known today as a diversified financial powerhouse with two principal segments: Global Consumer and Global Business-to-Business. Along with its catchy slogan of “Don’t leave home without it”, AmEx’s iconic green credit card is still widely recognized around the world as a premier card, carried mostly by affluent individuals with strong credit scores.
No doubt, AXP stock has had its ups and downs through the years. Looking at the Graph on the Value Line report, we see that its price sank to under $10 in 2009, from a high of nearly $66 just two years prior. The sharp retreat mostly reflected the adverse impact the recession of 2007-2009 had on profits, as credit card defaults rose. But the company, and the stock, showed much resilience in the years thereafter, with the bottom line bouncing back, as evidenced in the Statistical Array (center of the report).
After a nice multiyear run and reaching a peak of over $96 in mid-2014, the blue chip appears to have lost steam in the past few months. And the stock took a nasty hit more recently (not shown on the report), as news broke around the time of this writing that AmEx was ending its credit card partnerships with Costco Wholesale (COST) and JetBlue Airways (JBLU). Apparently, AmEx, which was in the process of renewing several deals, could not come to an agreement with neither the seller of bulk merchandise nor the airline over merchant fees. Remember that AXP not only charges an annual fee to its cardmembers, it also gets a cut from affiliated merchants that do business with cardholder customers. Loss of the Costco deal seems especially painful, since the union has lasted some 16 years and represents a substantial chunk of business, or one out of every 10 cards AmEx issues. Although news of the breakups is disappointing, the recent share-price weakness may create a viable entry point for interested investors.
In the meantime, note that the company pays a dividend. While the yield (found in the Top Label) isn’t eye-popping and clearly not the main draw at a meager 1.3%, we point out that a price pullback can actually enhance the return here. AXP has consistently paid, and even raised, the distribution over the years (as displayed in the Statistical Array and Quarterly Dividends boxes), with the exception of 2008-2011, when the payout was kept steady. Indeed, despite the hard times due to the recession, American Express never reduced the disbursement, unlike some other companies.
What’s more, as indicated by the analyst’s estimates in the Statistical Array, the company should continue to dole out handsome cash dividends through late decade. To this end, we see from the Annual Rates section on the left side of the report that hearty double-digit dividend growth is on tap for the next five years, a bonus for investors. That, coupled with decent long-term capital appreciation potential, should make for solid annual total return possibilities over that time frame, all of which is illustrated in the Projections box. Although we’re not suggesting that a share-price dip of the same magnitude seen back in 2009 is at hand, keep in mind that total return prospects would be even more enticing if the equity is purchased on a steeper pullback than the quotation shown on the report.
Besides being suited to long-term income-minded individuals, there are features of AXP stock which make it an attractive choice for those with other investment objectives. Conservative types, for example, might appreciate this blue chip’s fairly favorable risk profile. Notably, the Dow component sports an Above Average Safety rank of 2 (Ranks section), meaning that it carries lower risk than many equities in the Value Line universe. This is largely thanks to the company’s strong finances, highlighted by its superlative Financial Strength score of A++ (Ratings box).
Short-term investors, too, may be compelled by the issue’s Timeliness rank of 2 (Ranks section), which suggests good relative-price performance for the coming six to 12 months. Dow components are typically not known for being “timely”, so this is certainly another plus for AXP.
Whether near-term volatility will continue remains to be seen. Nonetheless, we believe that at the right price, most well-rounded portfolios stand to benefit from including this versatile blue chip.