American Express (NYSE: AXP) just won a big victory in the U.S. Supreme Court that will make it easier to charge higher swipe fees.
Amex can require merchants to sign contracts that bar them from giving incentives to customers that choose cheaper alternatives the Supremes ruled 5-4 in Ohio v. American Express. The state of Ohio argued that American Express had violated antitrust laws with “anti-steering clauses” or “gag orders.”
The clauses threatened Amex’s business model by enabling merchants to steer customers to cheaper alternatives. That seems like a win for Discover Financial Services (NYSE: DFS), JPMorgan Chase (NYSE: JPM), and Citi (NYSE: C). All of which have been competing heavily for American Express’s more affluent customers.
Ohio v. American Express is no Threat to Big Merchants
It is potentially a threat to next-generation alternatives like cryptocurrencies which offer the potential of much cheaper transactions. Small businesses in certain industries and locations might take a huge hit from the ruling because they are expected to take Amex cards.
Larger merchants like Walmart (NYSE: WMT) and Amazon (NASDAQ: AMZN) probably have enough leverage to avoid being required to sign gag orders. Businesses that might be it by new gag orders include those in the hospitality and restaurant fields.
Another possibility is that Amex might go after some of the big gig economy platforms like Airbnb, Uber, and Lyft, which are taking up an ever larger share of travel industry business. Whether such platforms have the clout to resist Amex’s orders is anybody’s guess.
One obvious strategy American Express can follow now is to discourage something like Airbnb from encouraging the use of Visa or MasterCard. Another would be to force gag orders on cryptocurrency companies and upon digital wallets like PayPal (NASDAQ: PYPL) and Apple Pay.
Big Banks are a Threat to American Express
American Express has been having a difficult time with cheaper alternatives aimed at affluent customers. That includes Barclays which has been making forays into the US credit card business. The greatest menace are the ever popular high end MasterCard (NYSE: MA) and Visa (NYSE: V) products from companies like JPMorgan Chase and Goldman Sachs (NYSE: GS).
Those cards can be used at more places than American Express and can be used all over the world. They also come with added banking services that will be a major attraction to the affluent.
One of the greatest threats to Amex is Goldman Sachs’ artificial intelligence powered Marcus which offers savings accounts and lines of credit. Goldman Sachs recently started offering its own credit cards. Investment accounts will be one of the major attractions to affluent card users at Goldman Sachs.
Supreme Court Decision will help Amex and Customers
Consumers might benefit because swipe fees finance popular perks such as cash back and rewards points. Amex might benefit because it can make more money.
Some consumers might suffer in the long run because merchants might pass higher swipe fees along to them, Business Insider speculated. This might discourage discounters from accepting American Express.
A smart move for Amex would be to seriously upgrade its rewards points and perks right now to keep customers. An obvious perk to offer would be more rewards points for customers that use American Express to make purchases through digital wallets like Apple Google, Google Pay, Alipay, PayPal, and Venmo.
Another smart perk to offer more rewards points or cash back for people that make online orders or pay bills online with American Express. Beyond that, special rewards points for rideshare apps like Uber and Lyft would make a lot of sense.
Is American Express Making Money?
American Express certainly has the resources to take advantage of just opportunities.
It generated a gross profit of $8.943 billion, an operating income of $2.082 billion, and a net income of $1.634 billion during the 1st Quarter of 2018. More importantly, Amex reported quarterly revenues of $8.493 billion that grew by 9.92% quarter one.
Amex’s income is growing dramatically, it reported a loss of -$1.97 billion during 4th Quarter 2017, Stockrow data indicates. Those numbers indicate that Amex is recovering from the loss of its biggest partner the gigantic American club retailer Costco Wholesale (NASDAQ: COST) last year.
More importantly, American Express is a cash rich company reporting a free cash flow of $1.826 billion during 1st Quarter 2018. That was down from $4.709 billion during 4th Quarter 2017. Amex also reported an operating cash flow of $2.063 billion in 1st Quarter 2018, down from $4.959 billion in the 4th Quarter of 2017.
Best of all, American Express is setting on a huge pile of cash. It reported $31.092 billion in cash and equivalents on 31 March 2018. That gives Amex the resources for a huge stock buyback or acquisition if it wants.
A smart move for American Express would be to buy Square Inc. (NYSE: SQ) which had a market cap of $25.09 billion on 2 July 2018. Square’s network of merchants would be a tremendous asset for Amex. Synergy can be generated by encouraging merchants with Square to take Amex cards.
American Express is a Dividend Stock capable of Serious Growth
American Express should invest heavily in cryptocurrency, blockchain, and other next generation payment solutions. PAYG platforms and remittance solutions aimed at developing countries are obvious revenue centers that Amex can tap to extend its ecosystem worldwide.
The bottom line is that American Express is a good value investment at the memoment. It was reasonably priced at $98.44 on July 2 2018, and a dividend of 35¢ was scheduled to be paid on 10 August 2018. News reports indicate that dividend increases are in the works.
At the end of the day American Express is still a great value investment in Fintech and credit cards. It is well worth for a look for those in search of dividend stocks that are capable of serious growth.