Credit card customers holding American Express Company (NYSE: AXP) cards are not (yet) showing signs that an economic slowdown is coming. On the company’s 4Q 2022 earnings conference call, CEO Steve Squeri said that spending by Amex’s generally higher-end customer base continues to remain strong. The company also announced a significant boost in credit card delinquencies, but investors largely ignored that detail.
The stock market heartily embraced American Express’ customer spending update, as well as the company’s decision to raise its annual dividend by 15% to US$2.40 from US$2.08, and the issuance of rosy 2023 guidance (sales up 15% to 17% and EPS of US$11.00 to US$11.40, ahead of analysts’ consensus estimates of $10.52 per share).
On Friday, American Express shares soared US$16.43, or 10.5%, to close at US$172.31.
American Express’ positive take on customer spending was generally in line with trends discussed earlier in January by another major credit card issuer, Bank of America Corporation (NYSE: BAC), and the giant credit card processing companies Visa Inc. (NYSE: V) and Mastercard Incorporated (NYSE: MA). Clearly, equity markets in January are reflecting this optimism as the S&P 500 Index and the tech-heavy NASDAQ Composite have leapt 6% and 11%, respectively, in just the first four weeks of 2023.
Investors decided to ignore American Express’ 4Q 2022 earnings miss. Sales of US$14.2 billion were in line with estimates, but EPS of US$2.07 in the quarter was US$0.14 shy of analysts’ projections. The company’s decision to boost its provision for credit losses to US$1.03 billion from US$778 million in 3Q 2022 and from just US$53 million in 4Q 2021 was a key reason for the earnings shortfall.
AMERICAN EXPRESS COMPANY
| Summary Financial Statistics (in millions of US $) | 4Q 2022 | 3Q 2022 | 2Q 2022 | 1Q 2022 | 4Q 2021 |
| Revenue | $14,176 | $13,556 | $13,395 | $11,735 | $12,145 |
| Provision for Credit Losses | $1,027 | $778 | $410 | ($33) | $53 |
| Return on Average Common Equity | 34.1% | 33.6% | 36.5% | 40.0% | 35.8% |
| Cash – Period End | $34,000 | $31,000 | $26,000 | $28,000 | $22,000 |
| Debt – Period End | $44,000 | $44,000 | $42,000 | $40,000 | $41,000 |
| Adjusted EPS | $2.07 | $2.47 | $2.57 | $2.73 | $2.18 |
| Shares Outstanding (Millions) | 743 | 747 | 751 | 755 | 761 |
Of course, this significant boost in credit provisioning seems inconsistent with American Express’ constructive outlook, but the stock market did not appear interested in any dark clouds on January 27. On the conference call, American Express’ CFO noted that the increase in delinquencies were anticipated.
The company also said that recent highly publicized layoffs at tech companies were not yet affecting its business. Indeed, American Express believes the increase in credit provisions was mostly a “normalization” from pandemic conditions when customers focused on paying off their credit cards. (To illustrate this, in 3Q 2021, the company reversed a net US$191 million of credit allowances.)
Clearly, American Express’ constructive 2023 earnings guidance and substantial dividend boost were positives. However, the recent share price spike might at least partially reverse for two reasons. First, investors seem to have too easily dismissed Amex’s 4Q 2022 boost in credit provisions. Second, even after the dividend increase, Amex’s dividend yield is 1.4%, not high enough by itself to support the stock, and a rate which is still below the 1.65% yield of the S&P 500 Index.
American Express Company last traded at US$172.31 on the NYSE.
Information for this briefing was found via Edgar and the sources mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.
