TAKING STOCK: American Express

Dear Mr. Berko:

Our broker wants us to buy 300 American Express for our growth and income portfolio. Please advise.

PE: Ft. Walton Beach, Fla.

Dear PE:

For many reasons I didn't like American Express in 2001 when it traded at $57 a share. I didn't like AXP in 2004 when it traded at $57 and I didn't like in 2007 when it traded at $57. And I don't like it today at $57. Even though AXP's revenues grew 50 percent and earnings and dividends have doubled since 2001, I still don't care for the stock. And while AXP is recommended by Standard & Poor's, Value Line, Merrill Lynch, Argus, Reuters, Goldman Sachs and J.P. Morgan I'm unconvinced that it belongs in a growth and income portfolio.

I know AXP is a classy name, that it's been in business before the Civil War and its name is as recognizable as Google, Coca-Cola, Facebook, Apple and IBM. I also know that American Express has a license to print money. And interestingly, a $100 American Express Traveler's check is held in higher esteem in many countries than a U.S. $100 bill. That's because AXP only prints money when it has the corresponding assets to back its Travelers checks. Perhaps Congress ought to hire AXP to run the FED and the Department of Treasury. AXP's travel-related services are the company's most well known division and its credit cards carry a special cachet like a Bentley Convertible or the Rolex Submariner. Remember the commercial: "There's something about an Aqua Velva man?" Well there's also "something about an American Express man." And AXP's Black Card, the Centurion, (less than 9,000 issued) is the sine qua non among those who have the mojo and covet its exclusive public image.

AXP's traveler's checks, its business travel and credit cards generate over 90 percent of its net income. And unlike Visa or MasterCard, AXP's cards are spend-centric rather than lend-centric. While other cards earn the bulk of their money collecting late fees and interests on debit balances, AXP's earnings derive primarily from fees it charges merchants. And because AXP focuses on high net worth individuals with strong credit, its loan write- offs of 1.9 percent are impressively less than Master Card or Visa (16 percent) that pass out cards like free samples. I remember a fun incident in 2005 when an acquaintance completed a VISA application for Fritz Fido, his 9-year-old Schnauzer. Ten days later, a MasterCard arrived in the mail with a $3,000 credit limit. And weeks later Fritz Fido began receiving mortgage solicitations from Bank of America and Wells Fargo.

All this palaver aside, AXP's other businesses are worth about as much as a tinker's damn. Its luxury magazines and luxury marketing events, its travel, cooking and financial books, its loyalty rewards programs, its huge direct mail and direct response advertising businesses, its consulting and fraud prevention services, etc., are becoming less unimportant to AXP's bottom line. Considering the growing recession in Europe and Japan and the continuing weakness in the U.S. economy, AXP may have some tough times ahead. The credit card industry is mega-saturated, with many folks carrying six to a dozen cards. Today there are fewer folks with solid credit ratings to grow AXP's credit card and travel related services business. This encouraged AXP to change direction and enter the pre-paid card business with Wal-Mart, a move that many believe may cost AXP costs some problems it hadn't bargained for. Cardholders are carrying record debt levels and AXP is beginning to experience a rise in its delinquency rates. As delinquency rates rise, AXP's profits decline significantly more than the rise in delinquencies.

Look around you. Are you, your friends and neighbors comfortable spending more money? If you answer "yes," then buy 300 shares of AXP. If the answer is "no," then consider shorting the stock and buying it back at $43. I like AXP but I believe the shares are overpriced for the future.


Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate website at www.creators.com.

© 2012 Creators Syndicate Inc.

Published: Fri, Nov 30, 2012