Times are tough at the grand old name in the U.S. credit card business. American Express (NYSE: AXP) just experienced a year of revenue shrinkage.
Amex reported revenues of $32.96 billion in March 2016 and $32.12 billion in December 2016. For the record, American Express started the year with revenues of $32.82 billion. It looks as if the divorce from Costco Wholesale (NASDAQ: COST) has hurt American Express.
Disturbingly it was not just revenues that fell, cash from operations at American Express fell by $3.276 billion between first and third quarters of 2016. Amex reported $11.31 billion in cash from operations in March 2016 and $8.034 billion in September. The number for December was not available but I suspect it is down as well.
Nor was it just cash from operations and revenues that were down, cash and short-term investments which fell from $33.77 billion in June 2016 to $25 billion in December 2016. Although net income increased slightly; growing from $5.064 billion in March to $5.408 billion December. Free cash flow as down considerably, it dropped from $2.686 billion in December 2015 to $1.422 billion in September 2016.
What can we learn from American Express’s Earnings Report?
Okay so what can learn from this numbers? Should we be worried about Amex or is it still a value investment.
Here are the lessons that I get from these numbers:
- American Express is still making a lot of money. Its business is still very profitable with a profit margin of 10.28%.
- American Express is still a cash rich company with a lot of float. It still had $25 billion in cash and short-term investments and assets of $159 billion on December 31, 2016. It also reported generating $4.644 billion in cash from financing in September.
- The value of Amex’s business is still increasing; assets grew from $153.38 billion in September 2016 to $159 billion in December. That number was still lower than the $159.64 billion reported in June.
- Some aspects of Amex’s business are also improving. Cash from financing grew from $-7.69 billion in September 2015 to $4.644 billion a year later.
My take is that American Express is still a value investment because of the cash and the assets. Even if it shrinking; Amex’s business is still very valuable and capable of quite a bit of growth.
The Future can be Bright for American Express
American Express also some very bright prospects for the future. One is the growing use of payment apps such as Apple Pay and Android Pay; which Amex supports. That might grow the value of credit card payments and profits from them.
Even greater opportunities exist in the world of fintech. One potential growth area is business payment processing, particularly for small business and social media. A possibility that Amex should investigate is the creation of a Venmo or Apple Pay type payment app.
The final area of growth is small scale lending, an area banks have been ignoring. Amex is offering small business loans and Next Step personal loans for businesses. Merchant financing and debt consolidation are major opportunities, which might grow if weaker competitors like Lending Club fall by the way side.
Is Amex Still a good dividend stock?
Despite its problems, Amex is still delivering for investors; it paid a 32¢ dividend on January 4, 2017. That was up from 29¢ in June 2016; and 26¢ in March 2015. American Express’s dividend has been growing every year since 2012, when it was 20¢. The dividend has been growing for about 3¢ for each quarter since April 2012.
Share value is also paying off as well, the price climbed from $59.90 on October 17, 2016, to $77.43 on January 24, 2017. That gave investors a return on equity of 25.97% on December 31, 2016.
Therefore, American Express is still a pretty good stock although I think it is a little overpriced. Investors should wait to see if the share price falls, which I think will happen this year before putting Amex into their portfolio.
Even if its revenues keep shrinking, American Express will keep paying off for investors for years to come. Nobody needs to be worried about AXP because there’s a lot of life and value left in this company.