The first time I invested a significant amount of money in individual stocks was in 2014. I had been primarily investing in index funds up until that point while learning about things like stock analysis and asset allocation strategies. To be sure, I had been buying small quantities of shares in certain companies since the early 2000s, but I was more than 90% invested in funds.
Then, in early 2014, I rolled over a 401(k) from a former employer and decided that it was finally time to buy some larger (for me) positions in individual stocks. I invested in four stocks, two of which are still in my portfolio today. Both have produced positive total returns, but with a 264% total return in about 10 and a half years (about 13% annualized), American Express (NYSE: AXP) has been the standout.
There’s a lot that has happened in the 10-and-a-half years since I became an Amex shareholder, and not all of it was good. For example, in 2016, American Express and Costco ended their 16-year partnership, and at the time, Amex’s co-branded Costco credit cards made up about 10% of all Amex cards in circulation and about 20% of its interest-bearing credit card loans.
However, there have also been some great developments. Not long after the Costco partnership went away, Amex revamped its flagship Platinum Card with benefits such as free Uber rides targeted at younger, affluent customers. The Platinum Card has been a major growth driver in the years since.
American Express has also done a good job of embracing online banking products, such as savings accounts, which provide a low-cost source of capital. The 2020 acquisition of Kabbage greatly improved the company’s business banking offerings as well.
Overall, since I bought shares, American Express has increased its revenue by 94% compared with comparable 2014 levels. On the bottom line, earnings have increased by 147%. And through buybacks, Amex has reduced its outstanding share count by more than 26% since mid-2014.
Even in the most recent quarter, Amex grew its revenue by 8% year over year despite significant reports of consumers pumping the brakes on discretionary spending. The company’s loan portfolio grew 10% year-over-year to $202 billion, and its annualized card member loan and receivable charge-off rate of 1.9% represents a sequential decline and is far lower than peers, which shows the asset quality Amex has. For context, Capital One has a credit card net charge-off rate of about 5.6%.
First of all, I bought Amex as a long-term dividend growth opportunity, and the stock (and business) are doing exactly what I want. Management has done a great job of consistently growing the business in a variety of political and economic climates and despite several setbacks, and I have no reason to believe that will change anytime soon. As a credit card lender, Amex has a best-in-class customer base in terms of credit quality and an impressive product portfolio. As a closed-loop payment network, Amex earns swipe fees that should gradually increase with customer spending over time.