5 Reasons to Buy American Express Now

NEW YORK ( TheStreet) -- American Express ( AXP) remains a fantastic pick for long-term investors, as the company consistently generates stellar returns on equity and returns the majority of generated capital to investors.

Even with a sequential decline in earnings for the third quarter, American Express delivered year-over-year revenue growth of 9% and a stellar 27.8% return on average equity, increasing from 25.9% a year earlier.

The shares closed at $48.46 Friday, returning 15% year-to-date. While it's not a fair comparison, the KBW Bank index has dropped 34% year-to-date.
American Express CEO Kenneth I. Chenault

So why go in now? American Express's shares trade for 3.7 times their Sept. 30 tangible book value of $11.99, according to SNL Financial. That seems mighty pricey when compared to names like Bank of America ( BAC) and Citigroup ( C), which trade well below tangible book value.

American Express is also more expensive relative to forward earnings than the best-known traditional U.S. banking names, with shares trading for 11.5 times the consensus 2012 earnings estimate of $4.22 among analysts polled by FactSet, while Wells Fargo ( WFC) is the most expensive of the "big four" U.S. banks, trading for just over eight times forward earnings, Citigroup and JPMorgan Chase ( JPM) trade just under seven times consensus 2012 earnings estimates, and Bank of America trades for just over six times forward earnings.

The market values American Express is often compared to traditional banks because the company has been such a consistently strong earner through thick and thin, and because of the support provided for the shares through a steady return of capital to investors, mainly through share buybacks.

And looking back to the beginning of the U.S. credit crisis, shares of American Express consistently traded over 20 times earnings.

After the company reported third-quarter earnings of $1.2 billion, or $1.03 a share, increasing from $1.1 billion, or 90 cents a share, a year earlier, Guggenheim Securities analyst David Darst reiterated his "Buy" rating for American Express, with a $56 price target, saying that the company's "business model differs from that of other primary card brands in that AXP spans from payment issuer to merchant acquirer in a closed loop network," and that the company is "unique relative to other bank holding companies given its revenue mix, which is primarily fee income driven," while the banks depend on interest-rate spreads.

Darst also described American Express as "an income statement driven company rather than balance sheet driven," and that "fee income accounts for more than 80% of total revenue."

Over the short term, investors could well see outsized gains on heavily discounted names like Bank of America and Citigroup, but American Express shines as a long-term quality play.

Here are 5 reasons to buy American Express now:

5. It's a lower-risk play.

A 15% rise in the share price during such a lousy year for financial names speaks for itself. Looking further at the company's earnings performance, American Express has achieved returns on equity (ROE) in excess of 20% for the past eight quarters, and looking back over the past five years, the lowest ROE was 9.37% in the second quarter of 2009, while the highest was 40.56% in the first quarter of 2007.

Over the past 20 quarters, the ROE has only dipped below 20% four times, and only dipped below 15% three times.

No other large U.S. financial institution can claim such strong financial performance.

4. Industry-leading credit quality.

According to credit card master trust data supplied by SNL Financial, American Express continued to lead the "big six" U.S. credit card lenders, with an annualized loss rate for serviced card portfolios of just 2.58% in September, compared to 3.17% for Discover Financial Services ( DFS), 4.13% for JPMorgan Chase, 5.54% for Capital One ( COF), 5.87% for Citigroup and 5.99%, for Bank of America.

American Express also had the lowest 30+ days delinquency rate for its serviced card portfolios in September, although the delinquency rate increased slightly to 1.64% from 1.56% in August. Discover was in second-place with a 30+ days delinquency rate of 2.50%, with JPMorgan in third-place, with a 2.53% managed card portfolio delinquency rate of 2.53% in September.

During the third quarter, American Express released $27 million in loan loss reserves.

David Darst said that the company's "credit trends continue to improve to historical lows," and that although "further improvement and reserve release seem less likely from current levels," he doesn't "anticipate profitability will deteriorate materially" if additions to loan loss reserves match loan losses during 2012.

3. International growth.

While American Express saw third-quarter net income in its U.S. Card Services segment increase 23% year-over-year to $733 million, the International Card Services unit saw its profit grow 53% year-over-year, to $221 million, with net revenues increasing 16% to $1.3 billion. This in part reflected the first-quarter acquisition of Loyalty Partner, which operated card loyalty programs in Germany, Poland and India.

2. Ready for Basel III, Unlike Many Others

American Express reported a 12.3% ratio of Tier 1 common equity to risk-weighted assets as of Sept. 30, which was unchanged from the previous quarter, despite the repurchase of $1.2 billion in common shares during the third quarter.

Following the third-quarter earnings release, DBRS Ratings maintained its senior debt rating for American Express at A (high), with a stable trend, saying that "given Amex's solid earnings capacity, resilient performance through the most recent cycle and sound capital position, DBRS views Amex as well-placed for forthcoming changes in regulatory capital requirements.

1. Return of Capital

With such a strong level of capital, American Express was able to essentially return all the capital it generated during the third quarter to investors, through share buybacks. In its third-quarter earnings release, American Express said that "on a cumulative basis, since 1994 the Company has distributed 64% of capital generated through share repurchases and dividends."

That's a pretty amazing track record, and with such strong returns on equity, it seems inevitable that over time, the return of capital will continue to be reflected in the share price.

American Express's best-in-class credit quality and its increased revenue and earnings have pushed the shares forward during a terrible year for most financial stocks.

Over the long haul, with slow economic growth in the U.S. and the build-out of its international business, investors in American Express could see its returns and stock valuation soar even higher.

-- Written by Philip van Doorn in Jupiter, Fla.

To contact the writer, click here: Philip van Doorn.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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