Stocks
by Zviad Maisuradze on July 3, 2020

Does American Express Stock Represent Undervalued Opportunity?

After experiencing a dramatic collapse back during the March 2020 stock market crash, the shares of American Express Corporation are continuing its recovery for several months now.

In order to illustrate the latest trends in the share price, let us take a look at this chart:

                                                                                                                                                                                             source: cnbc.com

As we can see from this diagram, 12 months ago, the stock was trading near $125 level. During the following months, the shares slowly retreated and went down to $112 level by October 2019. However, this downtrend turned out to be very short-lived. The stock recovered by the middle of February reached a new high of $137.

Just like in the case of many other securities, the stock fell victim to the March 2020 stock market crash. As a result within 4 weeks of trading, the shares dropped all the way down to $69 level.

As the panic selling ceased at the market, the stock made some notable gains, even advancing up to $113 mark during the early June 2020. However, this optimism at the market did not persist for long and shares slid back to the $94 mark.

Stock Valuations of American Express Corporation

According to CNBC, the earnings per share (EPS) indicator of the company currently stands at $6.60. This suggests that, at the current market price of $94.33, the price to earnings (P/E) ratio of the firm is close to 14.3. This suggests that the stock is currently still undervalued and this does offer a nice entry point for many value investors.

In fact, the shares of some of the blue-chip companies have already approached or returned to February 2020 levels, which made them significantly overvalued. So it is nice to see that there are still some high-quality stocks available at those reasonable prices.

However, for the sake of accuracy, it is worth noting that the American Express stock is not only a good addition to any growth portfolio, but it can also provide investors with some regular income. The company has a very solid track record of returning money to its shareholders.

Back in 2000, the firm’s quarterly payout amounted to just 8 cents per share. By 2008 the firm did manage to increase the rate of those payments to 18 cents per share. However, at this stage, due to the enormous challenges brought by the great recession, the company left those dividends unchanged until 2012. From this point, the management did resume its progressive dividend policy. By 2019, the quarterly payouts have reached 43 cents per share.

Here it is worth noting that despite the recent economic downturn, caused by the outbreak of COVID-19 pandemic and by subsequent travel restrictions and lockdowns, American Express management has avoided any dividend cuts and managed to maintain those payments to previous levels.

In fact, the board might even consider a moderate dividend hike, considering the fact that already 4 quarters passed by the last increase. This decision obviously will be heavily dependent on the future financial performance of the firm.

At current market prices, the current dividend yield of the stock is just above 1.8% level. This might not be very attractive for many income investors. In fact, in many countries, investors can earn similar returns on Certificates of Deposit (CDs). Here, unlike with stocks, they would not be risking the principal of their investments. Therefore at current prices, the dividend yield of American Express stock is not very appealing.

On the bright side, the payout ratio of the company is close to 21%. This suggests that the company has a quite wide margin of safety when it comes to distributing payouts to shareholders. Therefore the dividend payments of American Express Corporation are safe, at least for the foreseeable future.

At the same time, it is worth mentioning that there is always a potential for future dividend hikes, yet this is very much subject to the future financial performance of the company.

What does Latest Financial Reports Tell us about American Express

Speaking of financial results, the first quarter earnings report of the firm did show some problems the company faced since the outbreak of the COVID-19 pandemic. Firstly the total non-interest revenue stood at $7,980 million, which was approximately 4% lower than during the first 3 months of 2019 when this number was at $8,305.

Besides lending money to clients by its credit cards, the company also takes in some deposits as well, incurring some interest expenses along the way. The net interest income during the first quarter of 2020 has reached $2,330 million. This was around 13% higher than back in 2019. Finally, the net income of the company stood at $367 million, which was 76% lower than a year ago, when it reached $1,550.

Under normal circumstances, those would have been very disappointing results. However, considering the tremendous economic damage brought by the COVID-19 pandemic, those results still show the resilience of the business. Here it is worth noting that despite all of those challenges the American Express Corporation did manage to retain its profitability.

At the same time, the fall in the company revenue was not as sharp as in the case of many other businesses. Therefore the firm is well-positioned to recover from this economic downturn and regain its former level of profitability.

However, here it is important to mention that the second quarter results are not yet published. This will cover the company’s earnings during April, May, and June. Obviously, most likely this period was heavily affected by the lockdowns and travel restrictions.

Therefore, one can not rule out that the second quarter results might reveal some heavy losses for the firm. It can be worse than the first quarter result. Consequently, it might be better to wait for the latest earnings release in order to get a full picture of the company’s financial position. In this way, traders can protect themselves easily from potential surprise market moves in response to the latest quarterly results.

By Zviad Maisuradze

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