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Long Ideas

American Express is a Great Dividend Stock

All things considered American Express (NYSE: AXP) is still a great dividend stock.

Amex, the granddaddy of credit cards, still generates a lot of cash, makes a lot of money, and pays a great dividend. If you are just looking for a payment process that makes money American Express is it.

For example, Amex reported all of its revenues as gross profit for 2nd Quarter 2018. In particular, American express reported revenues of $9.196 billion and a gross profit of $9.196 billion on 30 June 2018.

Importantly, America Express’s revenues (and presumably its gross profit) grew at a rate of 7.07% during 2nd Quarter 2018. Therefore, American Express is still a finely-tuned moneymaking machine.

The American Express Money Machine Keeps Rolling

The American Express money machine keeps churning out vast amounts of cash despite incredible changes in the credit card industry.

For instance, Amex reported a net income of $1.623 billion and an operating income of $2.091 billion for 2nd Quarter 2018. Tellingly, American Express reported an operating cash flow of $3.033 billion, a financing cash flow of $4.184 billion, and a free cash flow of $2.734 billion for 2nd Quarter 2018.

Best of all American Express recorded $29.743 billion in cash and equivalents on 30 September 2018. Importantly,  $57.665 billion receivables augments that cash. The receivables are great because they are probably credit-card bill owes owed to Amex.

Interestingly, the value of the receivables is slightly less than American Express’s total debt of $57.855 billion. Therefore, Amex could pay off most of its debt with its receivables – if management wanted too.

Why American Express is a Great Dividend Stock

The cash makes American Express a great dividend stock. To demonstrate AXP offered shareholders a dividend yield of 1.45%, an annualized payout of $1.56, and a payout ratio of 21.5% on 2 October 2018.

The current American Express dividend is 39¢ scheduled for payment on 9 November 2018. Uniquely, that dividend is up 4¢ from August 10, 2018, when it was 35¢.

Moreover, American Express has delivered six years of dividend growth reports. For example, the dividend increased by 3¢ in 2017 rising from 32¢ to 35¢.

For this reason, American Express is an excellent income stock for long-term investors. You will make money if you add AXP to your portfolio.

How American Express Makes Money

American Express (NYSE: AXP) makes its money the old-fashioned way. To explain, Amex offers cardholders a lot of value for their monthly payment.

American Express offers a variety of travel perks found nowhere else, for example. For instance, American Express Platinum card perks include unlimited Boingo Wi-Fi connectivity, Uber credits, Airport lounge access, Hilton Honors gold status, and concierge service.

Impressively, the Platinum Card Concierge service includes staff available 24 hours a day and seven days a week. In particular, that staff includes 5,000 “lifestyle counselors.”

Beyond that there’s a Travel Insiders program staffed by professional travel consultants, Forbes contributor Amber Gibson notes. To demonstrate Travel Insiders consultant can tell you what hotel to stay in a strange city.

If you’re hungry, the Travel Insider can recommend a restaurant. Surprisingly, the consultant helped Gibson find a Yoga instructor in Manhattan.

American Express’s Value is its Attention to Detail

That attention to value and customer’s needs is American Express’s true value.

Specifically, Amex understands that its customers are human beings with specific needs and desires. American Express buys its customers’ loyalty with attention to their needs.

To put it differently, American Express owes its continued success to good old-fashioned customer service. Amex justifies its interest rates and fees with a high level of customer service.

Yes, PayPal is a Threat to American Express

Great customer service enables American Express to compete with far larger organizations like Visa (NYSE: V). Correspondingly offering great customer service helps Amex fend off challenges from next generation payment solutions like PayPal (NASDAQ: PYPL).

To clarify, PayPal is a direct competitor to American Express because the digital wallet offers similar services. For example, PayPal offers cards, loans, lines of credit, and other products for small business owners.

PayPal’s MasterCard (NYSE: MA) cash cards, in particular, are a direct threat to Amex because of a similar method of operations. To demonstrate the PayPal cash cards allow a user to pay with a current balance just like American Express’s monthly balance.

How Great Customer Service adds Value to American Express

Obviously, American Express cannot compete with PayPal in terms of low fees. Therefore, Amex counters with great customer service.

Great customer service offers a level of value to American Express that new competitors cannot match. Therefore maintaining a high level of customer service is critical for American Express.

There are several new payment technologies that are potentially direct threats to American Express. Digital wallets like PayPal, Apple Pay, Google Pay, Amazon Pay, Alipay, and WeChat Pay are the greatest threat.

Digital wallets are dangerous to American Express because they are convenient. Fortunately, Amex can counter digital wallets by adding its lines of credit to them. By supporting Apple Pay and Google Pay with American Express cards for example.

How Cryptocurrency Threatens American Express

Far more dangerous threats are cryptocurrency payment solutions which theoretically offer a far higher level of security and privacy. Cryptocurrency is a threat to Amex because the high level of privacy and security, and low fees it offers will appeal to wealthy users.

A major threat to Amex could be a cryptocurrency digital wallet supported by a Swiss bank account. Tellingly, Uphold is apparently marketing such a solution right now.

An obvious solution for American Express could be a cryptocurrency platinum card. To clarify the cryptocurrency platinum card could allow users to pay with altcoins like Ripple (XRP) or Dash (DASH). To demonstrate, several companies including Crypterium are developing cryptocurrency credit cards.

American Express could thrive by offering a cryptocurrency platinum card that combines altcoin payment and its high levels of customer service.

American Express’s devotion to customer service makes it a value investment. That value makes American Express (NYSE: AXP) a great dividend investment because it could ensure high-cash flows for decades to come.