The Incredibly Shrinking American Express
American Express’s (NYSE: AXP) business is shrinking right before our eyes. The credit card giant’s revenues fell by $420 million during third quarter 2016.
Amex started third quarter with revenues of $32.91 billion in June, and finished with revenues of $32.49 billion in September. It looks as if the loss of Costco Wholesale (NASDAQ: COST) has hurt American Express. Costco stopped using Amex as its exclusive card at US stores in June to the displeasure of many customers.
It looks as if American Express is struggling simply to retain market share. One has to wonder if this is the start of a steady decline or if the company can regroup and turnaround. Amex certainly has the resources to do so, if the will to use those resources exists.
American Express is Still a Cash Rich Company
Although its business is shrinking, the third quarter earnings report indicates that American Express is still a cash rich company. The highlights of that cash include:
- Cash and short-term investments of $27 billion on September 30, 2016.
- Assets of $153 billion on the same day.
- Revenues of $5.482 billion for the third quarter of 2016.
- Generating $6.875 billion in cash from investing.
- Generating $9.875 billion in cash from operations.
- Generating a free cash flow of $322 million.
The big question we need to ask here is how long Amex can keep all that cash. The amount of cash and short term investments fell by $6.77 billion over the course of the third quarter; falling from $33.77 billion in June, to $27 billion in September for example.
The net income also declined slightly falling from $5.606 billion to $5.842 billion. That indicates that American Express will have less money to play with in the future.
Yes, American Express is still a Value Investment
All this means that American Express is still a value investment because it generates a vast amount of cash and float.
What remains to be seen is how Amex will use all that cash and float. Will it buy back shares, expand, acquire other companies; such as Square (NYSE: SQ) or PayPal Holdings NASDAQ: PYPL) or invest in new technology. Square had a market cap of just $3.804 billion on October 24, 2016, making it an easy acquisition for Amex.
Will American Express Raise its Dividend?
Another possibility is that management will increase the dividend. That already seems to be happening and will happen again.
Amex paid a 32¢ a share dividend on October 5, 2016, up from 29¢ on June 29, 2016. Like a number of companies American Express is increasing its dividend to attract investors as its growth slows.
The dividend makes American Express a really good income stock, even as all the cash makes it a great value investment. Investors were rewarded with a 26.24% return on equity on September 30, 2016.
This makes AXP a good stock to add to a portfolio if you are looking for income. The problem is that its long-term prospects are not that great.
American Express’s Murky Future
The problem that American Express faces is staying relevant and competitive in today’s world. There are dozens of other credit card issuers out there; and some of them including Discover (NYSE: DFS), Capital One (NYSE: COF) and Citigroup (NYSE: C) are capable of matching or exceeding Amex’s level of customer service.
A potentially greater problem for American Express is the slow evolution of organizations like Bank of America (NYSE: BAC) into financial services providers. BOA, Citigroup and JPMorgan Chase (NYSE: JPM) and closing hundreds of branches as they shift their operations into the cloud, Business Insider reported.
BOA reported that 18% of its deposit transactions were made through mobile devices during third quarter 2016. That reduces the need for brick and mortar banks and increases profit at banks. The cost of a mobile transaction to Bank of America is 10% that of a desk transaction.
This points banks into direction competition with Amex and gives them an incentive to offer new cards and compete directly with Amex. Such blurring of the lines creates a such a situation in which banks, credit card providers and tech companies like Apple compete for financial business.
This portends a future in which financial services will be all electronic and there will be no difference between banks, Fintech and credit-card companies. In that world, Amex will either become bigger and more profitable than ever or slowly become irrelevant. Despite that it will be a good stock to own for years to come.