We're Adding This Membership-Driven Payments Name to the Bullpen
Here are the price levels that would spring us into action and the catalysts that could do the same.
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Following up on our primer about the differences between subscription and membership business models, we are adding American Express AXP shares to the Bullpen.
While we own Mastercard MA shares in the Portfolio, much the way Costco’s COST membership model makes it a standout in the retail space, it does the same for American Express.
And, much like Costco and its expanding membership that drives sales volumes, at American Express the growing membership base drives network volume gains and cash flow. So much so that American Express has been a buyer of its shares and repurchased 7.7 million shares so far in 2024. Under its current program, the company is authorized to still repurchase another 78.7 million shares, which will help EPS comparisons as it chews through that program.
We suspect that activity will be balanced by returning capital to shareholders via dividend increases. In 2022, management reinstituted the rising dividend policy that was halted during the pandemic and it currently stands at $0.70 per quarter. With the record date for its fourth-such payment set for January 3 with a mid-February payment, if the past holds, American Express should unveil its next quarterly dividend in early April.
Why Not Add to the Portfolio at This Time? Valuation
While we like the dynamics of the membership business model and the benefits associated with the cash flow it brings, we are not adding AXP shares to the Portfolio at this time.
Our reasons include the strong run it has enjoyed, more than doubling since late October. That pronounced move means that at current levels their P/E multiple of 20-times expected 2025 EPS of $15.13 is stretched compared to historical levels, where the shares have peaked at an average P/Em multiple near 18x. The same description can be applied to the current dividend yield tied to shares at 0.9%, compared to the average peak share price of 1.1%.
As things stand now, a pullback to $270 would not only close the early November price gap we see in the chart, but it would take some of the froth out of the share valuation. A pullback closer to $250, in our view, would make for a far more compelling buying opportunity.
Catalysts That Could Spring Us into Action
At the same time, we have to be on watch for catalysts that could drive the company’s 2025 EPS higher. Those include another batch of card price increases that would continue to lift its average fee per card. That average fee stood at $105 across the company’s 145.5 million cards-in-force exiting the September quarter.
New card programs, including those with third parties, and additional perks would be other potential catalysts as they could continue to the pace of brisk growth for the number of cards-in-force. As we noted above, while the company’s cards-in-force stood at 145.5 million we’ve seen a slower rate of growth for that so far this year. Through the first nine months of 2024, American Express added 4.3 million cards-in-force compared to 4.9 million through the first nine months of 2023 and 9.7 million ads in the first nine months of 2022. While that is balanced by the higher average fee per card compared to $92 in 2023 and $82 in 2022, slower card growth means slower revenue, earnings and cash flow growth compared to prior quarters.
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At the time of publication, TheStreet Pro Portfolio was long MA and COST.
