American Express Consolidates Position - Analyst Blog

American Express Company AXP recently came up with a couple of announcements that we expect will attract investors' attention. The first announcement was that of a hike in the company's dividend while the second pertained to expansion of its merchant network. The two developments are not related but are expected to benefit the company going forward.  

Dividend Hike

In its first announcement, American Express increased its quarterly cash dividend by 13%. The raised dividend now stands at 26 cents per share against 23 cents paid on Feb 10, 2014. The revised dividend will be paid on Aug 8, to shareholders of record as of Jul 11.

Prior to this, American Express had announced a 15% hike in its quarterly cash dividend in Apr 2013. The company has consistently been paying dividends, which have grown at a 3-year CAGR of 13%. This reflects the company's financial strength. American Express will have to dish out $277.4 million every quarter for its dividend payment, based on the outstanding share count of 1.07 billion as of Mar 31, 2014. The company has ample liquidity for the payment, with cash and investments of $21 billion as of Mar 31, 2014.

Merchant Network Expansion

In consistence with its commitment to enhance the U.S. small merchant experience, American Express has expanded its merchant acquiring program, OptBlue. The expansion has added four participants, namely First Data, EVO, Merchant e-Solutions and First American Payments Systems, which brings the total number of OptBlue participants to 10.  

OptBlue provides a convenient solution for the U.S. small merchants whereby they can enjoy the benefits of American Express Card acceptance. Participants under this program will be able to avoid hassles related to payment processing that small merchants face in the country. This will be possible through provision of benefits like single statement, one settlement process and one contact for all the major card brands. This in turn will broaden the U.S. small merchant coverage for American Express.

Our Take

First, with the dividends increasing at a CAGR of 13%, the company's capital deployment strategies seem prudent. The company performed well in the annual stress test of the Federal Reserve and this primarily gave it the flexibility to announce the dividend hike. Additionally, the company is intent on increasing its share repurchases up to $4.4 billion in 2014 and by an additional $1 billion in the first quarter of 2015. We believe these capital management activities justify American Express' commitment to return more value to its shareholders. Going forward, continued efforts like these are expected to not only help the company retain the confidence of its existing shareholders but also attract more investors.

Coming to the merchant network expansion, American Express has been acquiring merchants through a number of channels like a proprietary sales force and inbound channel, External Sales Agents, OptBlue program and so on. OptBlue is specifically designed to cater to those U.S. small merchants who have an American Express charge volume of less than $1 million annually. OptBlue provides these merchants the opportunity to connect with high-spending, loyal card members.

With small merchants comprising a significant percentage of the total sales in the U.S. and with the increase in the number of small merchants in the country over the last three decades, this expansion provides immense growth potential to American Express. Endeavors like these will help the company to gain a greater share of the everyday transactions that are being made and hence, bode well for medium and long-term growth.  

Zacks Rank

American Express carries a Zacks Rank #3 (Hold). Investors interested in the financial services space may consider better-ranked stocks like Euronet Worldwide Inc. EEFT, Ladder Capital Corp LADR and Cielo SA (CIOXY). All of these have a Zacks Rank #1 (Strong Buy).
 

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