American Express: To Buy or Not to Buy? (Part 2: Numbers)

Alright,

Now the exciting part: Numbers for the past decade.

**historical performance does not predict future performance, but may serve as a guide–at least for me, that’s how I see it.

The Gross Overview:

Profit and Profit Growth

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Profit and Profit growth. Author’s Calculation.

Owner’s earnings (free cash flow) and growth:

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Owner’s Earnings. Author’s calculation.

It appears that even though AMEX had not perform quite consistently in growth, it had ups and down years but in the long-term it still was able to manage to grow its profit and owner’s earnings—a definitely positive sign.

Debt to Equity Ratio (Author prefers <0.5):

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D/E ratio.

Fail on this metric. But let us compare this with AMEX other top peers.

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DE comparison.

It appears that for the past decade, AMEX would have been my LEAST favorite in the group because of this D/E metric.

The company basically carries a lot of debt with it.

Visa and Mastercard, on the other hand, has no debt at all. Investors had well-rewarded these two granting them PE of 30 each. AMEX currently sells for only 13 times earnings. A 50% discount from these two top peers at the DE aspect.

Nevertheless, I can observe that AMEX is trying to lessen its debt since the Great Recession (scroll up to see the chart again).

Next, Dividend and growth:

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Dividend and growth. Author’s calculation

This is just weird. A sudden 88% upswing in dividend in 2014. Now, AMEX is faced with series of problems, which may have a small or big impact in its profits (we’re going there shortly); that may bring me to question its commitment to the dividend-performance in the future.

Remember there may be ~7% decline in profit (author’s estimate) in 2016 and onwards, of course only if AMEX fails to cover its Costco break-up.

This brings me to my theory: that the current dividend rate would be under threat.

Next, Profit Margin (Author’s preference 8%):

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AMEX easily met this metric TOO.

Next, Profit/Owner’s earnings ratio:

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Profit/owner’s earnings. Author’s calculation.

This is a new ratio I made for this specific AMEX case. Basically, what I am trying to determine (assume) here is there is a possible correlation with profit and owner’s earnings growth.

For the math nerds, R-coefficient I calculated between the two is +0.62, which signifies a positive-large strength of association.

More importantly, it was only recently that profit had more than 50% contribution to owner’s earnings, which further strengthens my assumption that decline in profit may have an effect on AMEX’s capability of handing out dividends and buying back shares.

Money used for those are usually coming from Free cash flow or owner’s earnings.

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Share repurchase in USD millions

Interestingly, there are recent debates about how U.S. companies misuse their cash in share buybacks (repurchase). Here are some points:

  1. Is the company buying back shares at a lower valuation (P/BV or P/E)?
  2. Is the company doing this to massage their earnings?
  3. Has the company been spending too much in buying back their shares?
  4. and so on..

In this blog, I’ll just see whether AMEX is guilty buying back shares when its shareprice is overvalued. I compared the repurchase program to the ongoing P/BV valuation:

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PBV and sharebuyback program.

My conservative thoughts assume that AMEX should be at least buying lower than 10-year median of PBV of 4. In this case, it was guilty of ‘overspending’ during 2013 and 2014.

So, going back, will that 7% (hypothetical decline) be really a threat to the dividends AMEX shareholders are currently enjoying?

Let’s run some more numbers:

To just run a simple test and an easier way of finding out, I checked how much exactly is AMEX giving back to its shareholders with dividends.

  1. Dividends as a % of profit
  2. Dividends as a % of Owner’s earnings
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% Dividends/Profit and Dividends/Owner’s earnings. Author’s calculation.

And it seems that AMEX has been very CONSERVATIVE in giving out dividends, including that 88% increase in dividends in 2014.

Let’s include in the equation, the share repurchase expenses.

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Dividends + Buyback % of profit and owner’s earnings. author’s calculation.

This time, we see a different AMEX. Unless it decides to decrease its $ allocation to buybacks and/or dividends, AMEX would soon pass the 100% mark in profits being handed out to shareholders.

Imagine a company earning for the sake of just handing out profits while maintaining its operations. Will that be a prospective buy?

Now, this is a little conservative, but what if both profits and owner’s earnings declined by 7% as what I assumed to be possible in a worst case scenario (no growth, no Costco replacement–remember that AMEX has still a recent case possible ‘facing billions’ of charges.

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Looking retrospectively (2014) while applying a futuristic assumption (Costco’s possible -7% influence in profits and owner’s earnings), AMEX appears to be someone in a difficult position with its profits payout, but still dividends may still be sustainable in terms of the other (owner’s earnings).

This is where, I think AMEX may be a hold and not buy for now. This is because near 100% payout ratio is a little bit a concern to me.

Next blog will be a simple discount cash flow model for AMEX, so as I can determine its intrinsic value at No Growth rate.

Disclosure: I do not have shares in any of the companies mentioned in this article and don’t plan to initiate purchase within the next 24 hours. I would not receive any compensation for doing this article. I am not a professional financial analyst. This is just a hobby. Lastly, my work is not error-free, but I strive for it to be. Do not consider as a buy or sell advice. Invest at your own risk.

If you are interested in this similar approach to investing and would seek updates or share ideas, I wish to invite you to this Facebook group SEEKING VALUE (https://www.facebook.com/groups/SeekingValue/?ref=bookmarks)

Happy investing.

Mark Y.

 

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