Twice the Upside With Better Yield

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American Express (NYSE: AXP) is a leading global payments and travel & expense service company.  Specifically, the company operates in two groups, the global consumer and global business-to-business groups.  All card services are in the merchant group, and network and merchant services are in the business-to-business group.  Although very diversified, the company is primarily a charge card company, deriving most of its revenues from U.S.card services (52% of total revenues) and international card services (17% of total). 

In terms of size, American Express has a market cap of $63.4 billion as of this writing.  To put that in perspective, it is right in the middle of its two closest competitors, Visa (NYSE: V) and MasterCard (NYSE: MA).  Visa is the largest, with a market cap of $78.6 billion, and MasterCard is a little smaller, at $57.8 billion.

Analysts project a 3-year average earnings growth rate of 12%, which is very nice for a company of this size.  The company’s primary growth strategy is to 1.) Acquire and retain high-spending, creditworthy cardholders, 2.) Design card products that appeal to specific groups of consumers, and 3.) To use incentives to encourage spending on its cards (such as airline miles).

So, why should an investor buy AXP and not one of its rivals?  The main reason is valuation.  AXP currently trades at 12.8 times 2012 earnings, very low compared to the other two companies mentioned.  Analysts’ consensus estimates call for 2013 and 2014 earnings of $4.77 and $5.19, respectively, so this means AXP is trading at 11.9 times forward earnings and 10.9 times 2014 earnings. 

In direct contrast, Visa trades at 20.2 times TTM earnings and MasterCard at 21.8 times.  In addition, both of those companies have similar growth projections.  Analysts tend to think these two are fairly valued, with average 1 year price targets of $154.38 on V and $516.13 on MA, or only 5.1% and 5.4% above current price levels, respectively.  AXP, on the other hand, has an average price target of $62.68, or 11% over current price levels. I actually have a slightly more ambitious target on AXP.  The middle of AXP’s 5-year historic P/E is just above 15 times earnings.  Using this multiple and projected 2013 earnings, I have a price target of $71.55, or 26.3% above current levels.

In addition to offering twice the potential upside as Visa or MasterCard, American Express also pays a much better dividend.  Although a 1.41% yield may not be large in comparison with typically thought-of dividend stocks, it sure looks better than Visa’s 0.9% yield.  It definitely looks better than MasterCard’s 0.25% yield!  Also, AXP has a good history of raising dividends, as seen in the chart below.  Even throughout the financial crisis, AXP never cut their dividend.  They simply kept the 72 cents per share level for the next several years, before raising it to 80 cents this year.


<img src="/media/images/user_14267/axp-chart_large.png" />

In closing, I will say that a good case can be made for any of the “big three,” as all are great companies that should turn out to be fine investments for their shareholders.  American Express simply seems the most attractively valued right now, not to mention the best yielder out of the group.

KWMatt82 has no positions in the stocks mentioned above. The Motley Fool owns shares of MasterCard. Motley Fool newsletter services recommend American Express Company and Visa. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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