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American Express Settlement Is Small Bump in Road

Stocks in this article: AXP

NEW YORK (TheStreet) -- American Express (AXP) late on Tuesday announced a settlement with regulators over its cross-selling of add-on credit protection products to customers, but what should really concern investors is whether or not 2014 can be another banner year for the stock.

American Express on Tuesday announced a series of settlements of "previously disclosed regulatory reviews of marketing and billing practices" with the Consumer Financial Protection Bureau (CFPB), the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency.  The settlements included $16.2 million in fines, along with "at least $59.5 million in customer remediation," most of which has already been paid.  The company also said most of the costs associated with the settlements had been booked during previous quarters.

The settlements resulted from regulatory investigations of the cross-selling of credit protection products, which resulted in significant fines to competitors of American Express during, including Capital One (COF), JPMorgan Chase  (JPM), Bank of America  (BAC) and Discover Financial Services, (BAC) during 2012.

American Express had agreed in October 2012 to civil fines totaling $27.5 million to settle investigations of "certain aspects" of its U.S. consumer card practices, and set up an $85 million restricted fund for customer refunds. 

The company on Tuesday said the marketing of its identity theft, "Account Protector" and "Lost Wallet Protector" products had been "discontinued more than a year ago."

So Tuesday's announcement is good news for the regulators and consumer advocates who rightly pilloried credit card companies' foisting of expensive and arguably unneeded credit protection "services" to their customers.

For investors, the cost of the settlements means nothing, and the timing of the settlements means there's one less negative headline for American Express next year.

"Overall, we would view the settlement as a positive step as it helps clear the issues around the marketing of add-on products that AXP has
discontinued for over a year," wrote KBW analyst Sanjay Sakhrani in a note to clients late Tuesday.

Sakhrani continues to rate American Express "outperform," even though the stock has returned 56% this year through Tuesday's close at $88.69.  That is quite a performance, even in the midst of a bull market that has seen the S&P 500 rise 29%. 

For the first three quarters of 2013, American Express reported a return on average equity (ROE) of 24.3%, which was down from 26.3% a year earlier, but was still a very respectable number.  Earnings attributable to common shareholders rose 11% to $3.67 a share for the first three quarters of 2013 from $3.31 a year earlier, reflecting a 5% year-over-year increase in revenue, and also a 5% decrease in the average share count.

The company's financial targets, "on average and over time," include EPS growth ranging from 12% to 15% and ROE of 25% or more.

American Express repurchased about $3.153 million worth of common shares during the first three quarters of 2013, and said it expected to complete roughly $800 million in additional repurchases during the fourth quarter.

The shares trade for 16.4 times the consensus 2014 earnings estimate of $5.42 a share, among analysts polled by Thomson Reuters, and for 14.7 times the consensus 2014 EPS estimate of $6.03.

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