American Express (AXP -0.79%) is a top holding for Warren Buffett-led Berkshire Hathaway's massive equities portfolio. It has worked out well, especially recently, as shares of the card payment giant have risen 153% in the past five years (as of Nov. 26).
With this financial stock trading in record territory, you might be wondering if adding the business to your portfolio is a smart decision. It just might be. Here are three reasons to buy American Express shares like there's no tomorrow.
The past couple of years, with high interest rates and a period of elevated inflation, created an uncertain economic environment. However, American Express has continued to put up strong financial results.
Net revenue increased 14% year over year in 2023, before rising 9% through the first nine months of 2024. These impressive top-line gains were driven by solid card member growth and higher payment volumes.
The company's income trajectory provides another encouraging trend. Executives upped their guidance, now expecting a 24% double-digit earnings per share (EPS) bump for all of 2024. The projected EPS total of $13.95 (at the midpoint) for 2024 would be 75% above 2019's figure.
Perhaps one of the key reasons that Buffett owns this stock is because American Express has staying power. The business has been around since the mid-1800s, which should give prospective investors confidence that it can last for a long time.
One important factor protects American Express from existing competitors, like other banks and payment networks, and new entrants to the industry, including fintech upstarts. This company has a wide economic moat, demonstrating it's a high-quality enterprise.
American Express has one of the strongest brands in the financial services sector. This is supported by premium credit card offerings, like the Centurion Black card and the Platinum and Gold cards. Due to high annual fees and fantastic perks and rewards programs, Amex naturally attracts a more affluent customer base that has the ability to spend more.
That greater spending ability results in more revenue potential for the company, while also helping keep charge-off rates in check. And thanks to the brand's standing, Amex is able to occasionally raise its annual fees, something that hasn't prevented customer growth.
Another part of American Express' moat is the presence of network effects. The huge number of cardholders, paired with the vast number of merchant acceptance locations, make the Amex platform extremely valuable to all parties involved. It would be nearly impossible for anyone to create a new payment network like this from scratch.
Investors can't ignore the valuation when looking at stocks to buy for their portfolios. Pay too high a price, and the potential for strong returns is diminished.
As of this writing, Amex shares trade at a price-to-earnings (P/E) ratio of 22.5. This represents a 25% premium to their trailing 10-year average. The stock's tremendous 63% gain in 2024 (as of Nov. 26) has made things a bit more expensive for prospective investors looking to follow in Buffett's footsteps and buy American Express.
However, I believe this valuation is reasonable. For comparison's sake, the S&P 500 trades at a P/E multiple of 24.7. I think it's easy to make the argument that American Express is a higher-quality business than the average that's in the broad index of 500 large companies.
It also helps that consensus analyst estimates see EPS rising at an annualized rate of 15.4% between 2023 and 2026. Add this outlook to a nearly 1% dividend yield and the possibility of valuation expansion, and the stock looks like a smart buy right now.