We saw another good quarter with American Express (AXP); revenues rose 9% leading to EPS of $1.84, up 25% from last year with help from a 23.7% decrease in income taxes and a 3% decrease in shares outstanding.
That said, the internal data in the income statement presages a decent but weaker 2019 if things keep the same pace. Non-interest revenues rose 9% and interest revenues were up 7.1%, hurt by provisions for credit losses that came to 44% of net interest income before provisions. That is up from 38% last year.
Amex is new to the lending game. That may explain why its provisions are so high. I don’t know if it’s over-reserving for losses or it has loosened its credit standards more than a regular bank would, and actually needs higher reserves.
However, the bottom line is that the lending segment does substantially augment other sources of income. In fact this year interest income rose to 9.9% of the amount earned from fees and other sources, while last year that amount was only 7.6%. So, even though the profit margin may be lower in that segment of the business, it’s still well worth pursuing.
Interest expense is separate from operating expenses. Operating expenses rose 7.1%, leaving pre-tax income just 6.8% higher. So, with tax rates next year comparable to this year, there won’t be a tax cut to boost the bottom line.
If we get a couple of percentage points of revenue growth and get to 9 or 10% growth in EPS, I think that would be a good year.
In addition, the company plans to buy back up to $3.4 billion of its common shares through Q2 2019. I’m usually not a fan of buybacks, but if the P/E stays around its current 14, stock buybacks would not be unreasonable at that price.
Also making us smile, the company raised its dividend 9% in Q2 to 35¢ and plans to raise it 11% to 39¢ in Q3. The payout ratio was just 19%, so that leaves an enormous amount for growth initiatives and the announced buybacks.
We’ve done pretty well with Amex so far. We’re up 41% in 20 months on our first position and 3.8% in 5 months on our second. Moreover, its P/E is slightly below the market’s historical average while the overall market is at its second- or third-most expensive in history, depending on which criterion you use. That should give us better traction if the market starts to slip.
