The financial services sector has been on a roll this year. And credit-card titan American Express (NYSE: AXP) has really been on a roll.
Its stock has returned 27.5% year to date, far outperforming the S&P 500 Financials index at 16.2% and the overall S&P 500 index at 18.9%. Amex returned an annualized 37.6% for the last three years, 26.8% for the last five years, and 18.8% for the last 10 years. That beats both indices for all periods.
You know a company is doing something right when it’s the second biggest holding of Warren Buffett’s Berkshire Hathaway after Apple (NASDAQ: AAPL). Berkshire holds $56.9 billion of Amex shares, or 22% of its market capitalization.
Perhaps the two biggest strengths for Amex are its upscale clientele and its “closed loop.” As of 2023, 38% of its customers said they had a net worth above $1 million, according to Motley Fool.
Obviously the wealthy can spend more and avoid defaulting on their bills. In 2024, the average American Express cardholder spent more than $24,600 on their card, well above the average for a Visa (NYSE: V) or Mastercard (NYSE: MA) cardholder, according to Morningstar.
Closed loop benefits
As for the closed loop, that means Amex directly manages the entire payment process, acting as card issuer, network, and merchant acquirer, unlike Visa and Mastercard’s “open-loop” model which uses intermediaries.
Amex’ unique structure gives it direct relationships with both cardholders and merchants, enabling it to collect valuable spending data, offer targeted rewards, and provide distinctive insights to merchants.
Some of Amex’ cards (like platinum and gold) require full monthly payments of bills, and customers of cards that don’t require it often do so anyway to avoid interest charges. Amex garners only 25% of its revenue from net interest income.
To be sure, its shift toward younger cardholders and more lending features on its cards led to 26.1% compounded annual growth in net interest income from 2021 to 2024, notes Morningstar analyst Michael Miller.
Generation Z (those born from 1997 to 2012) accounts for 5% of U.S. spending on Amex’ cards and other products, such as travel, said CFO Christophe Le Caillec, according to Bloomberg. And he pointed out that Gen Z transaction volume soared 40% in the first quarter from a year earlier.
Corporate business, fee increase
On the corporate side, companies accounted for 34% of Amex spending volume in 2024, and their spending rose 4% in the third quarter this year from a year ago.
Meanwhile, in September, Amex overhauled its platinum card, raising the annual fee 29% to $895 from $695. New benefits include an increase in the hotel credit to $600 annually from $200 previously and a quarterly credit of $100 for purchases at Resy-affiliated restaurants.
“This will provide a significant tailwind to the firm’s already substantial card fee income, which we expect to increase by a high teens percentage in 2026,” said Morningstar’s Miller.
Looking at Amex earnings, revenue climbed 11% in the third quarter from a year earlier to $18.4 billion, and earnings per share gained 19%. U.S. consumer spending rose 9%. The number of cards in circulation increased 4%, with 72% of new accounts coming for cards that charge fees (luxury cards).
The surge of Amex’ stock price shows it’s getting credit for its strong fundamentals.
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