During the past year, Warren Buffett’s Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) sold a lot of its top stocks — including Apple (NASDAQ: AAPL) and Bank of America (NYSE: BAC) — to boost its cash holdings to record highs. For some investors, those sales suggested Buffett was bracing for a market crash.
A market pullback wouldn’t be surprising, since the S&P 500 (SNPINDEX: ^GSPC) has already rallied nearly 80% during the past five years and looks historically expensive at more than 30 times earnings. However, Berkshire Hathaway didn’t sell any shares of American Express (NYSE: AXP), which accounts for 14.8% of its portfolio. Let’s see why Buffett isn’t selling this resilient blue-chip stock — and why it might still be one of the best places to invest $1,000 right now.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
An evergreen business model
Berkshire Hathaway holds shares of American Express, Visa (NYSE: V), and Mastercard (NYSE: MA) in its investment portfolio. However, its $43.6 billion stake in American Express dwarfs its $2.6 billion stake in Visa and $2.1 billion stake in Mastercard.
American Express is often compared to Visa and Mastercard, but it has a very different business model. American Express is a bank, payment processor, and card issuer, and it backs its cards with its own balance sheet. Visa and Mastercard don’t issue any cards themselves or hold any consumer debt — they only partner with banks that issue co-branded cards and extend credit to shoppers. All three companies charge merchants so-called swipe fees to process purchases made with cards.
American Express’ approach exposes it to more credit risk than Visa and Mastercard, but it only approves cards for higher-income customers with high credit scores. That focus on higher-quality accounts reduces its long-term credit risk, but it also limits the growth of its customer base. That’s why Amex cards are generally accepted at fewer businesses (especially overseas) than Visa and Mastercard.
American Express’ diversified business model makes it more resistant to interest rate changes than Visa and Mastercard. In 2022 and 2023, inflation and rising rates generated headwinds for Visa and Mastercard as consumer spending slowed down. However, American Express’ focus on wealthier consumers insulated it from inflation, and rising rates boosted its banking segment’s profitability.
Looking ahead, lower rates should generate tailwinds for American Express’ credit card business and offset the lower-net interest margins at its banking business. In other words, it’s a reliable evergreen stock for bull and bear markets.
Stable growth with consistent buybacks
From 2013 to 2023, American Express revenue (net of interest expense) and diluted earnings per share rose at a compound annual growth rate (CAGR) of 6% and 9%, respectively. It also bought back nearly a third of its shares outstanding. It maintained those rock-solid growth rates during the past three tumultuous years.
|
Metric |
2022 |
2023 |
9M 2024 |
|---|---|---|---|
|
Total revenues (net of interest expense) growth (YOY) |
17% |
14% |
9% |
|
Diluted EPS growth (YOY) |
166% |
14% |
28% |
|
Change in shares outstanding (YOY) |
(2%) |
(2%) |
(3%) |
Data source: American Express. YOY = Year over year. Table by author.
For 2024, American Express expects its revenue to increase 9% as its EPS rises 23% to 25%. It attributes that growth to the stabilizing U.S. economy, its growing adoption among higher-income Gen Z and millennial shoppers, and its international expansion.
From 2023 to 2026, analysts expect its revenue to increase at a CAGR of 9% as its EPS rises at a CAGR of 15%. Its stock still looks cheap at 19 times next year’s earnings, and it pays a decent forward yield of 1%.
A great buy for Buffett, as well as the smaller retail investor
Warren Buffett started to buy American Express back in 1998, and hasn’t bought or sold any new shares since 2012. The stock has rallied about 430% from his average purchase price of $55.50, but it could still have plenty of room to run over the next few decades. That’s probably why Buffett hasn’t reduced his exposure to American Express, even as he recently sold some other long-time holdings, and why it could still be a great place for smaller investors to park a modest $1,000 investment.
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*Stock Advisor returns as of November 11, 2024
Bank of America is an advertising partner of Motley Fool Money. American Express is an advertising partner of Motley Fool Money. Leo Sun has positions in Apple and Berkshire Hathaway. The Motley Fool has positions in and recommends Apple, Bank of America, Berkshire Hathaway, Mastercard, and Visa. The Motley Fool recommends the following options: long January 2025 $370 calls on Mastercard and short January 2025 $380 calls on Mastercard. The Motley Fool has a disclosure policy.