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American Express Co. , also known as AmEx, reported its second-quarter 2013 operating earnings per share of $1.27. The result outpaced both the Zacks Consensus Estimate of $1.21 and the year-ago quarter earnings of $1.15 a share.

Consequently, net income from operations climbed 5% year over year to $1.41 billion from $1.34 billion in the year-ago period.

AmEx’ total billed business, or global card spending, continued to witness improvement in the U.S. and beyond. This business grew 7% year over year to $237.7 billion. upside came on the back of an improvement in international cards-in-force, up 7% year over year to $78.0 million. Meanwhile, cards-in-use also grew 7% in the U.S.

Behind the Headlines

AmEx posted total revenue, net of interest expenses, of $8.25 billion, up 4% year over year from $7.97 billion. The result breezed past the Zacks Consensus Estimate of $8.24 billion. The year-over-year upside in revenues was supported by moderate growth in card spending, net interest income and loan portfolio. Further, delinquency rates and yield exhibited stability, partially offset by lower lending balances.

However, provisions for losses were $593 million, spiking 29% from $461 million in the prior-year quarter. The increase was driven primarily by lower reserve release, partially offset by lower net write-offs in the reported quarter.

Meanwhile, AmEx’s total expenses inched up 1% year over year to $5.66 billion in the reported quarter. This reflected a rise in card member rewards, professional services and occupancy and equipment expenses. These were partially offset by flattish salaries and benefits expenses along with a decline in communication and other operating expenses. However, tax rate jumped to 30% from 29% in the year-ago quarter.

Segment Results

U.S. Card Services reported net income of $743 million, up 3% from the prior-year quarter. Total revenue, net of interest expenses, increased 5% to $4.2 billion from $4.0 billion in the year-ago quarter.

International Card Services net income came in at $208 million, up 17% from $178 million in the year-ago quarter. However, total revenue, net of interest expenses, came in at $1.3 billion, flat from the year-ago quarter, but up 3% on a constant currency basis.

Global Commercial Services net income improved 3% to $226 million from $219 million in the prior-year quarter. Total revenue, net of interest expense, inched up 1% year over year to $1.2 billion, reflecting higher spending by corporate card members, while business travel commissions and fees declined.

Global Network & Merchant Services reported net income of $412 million, up 11% from the prior-year quarter. Total revenue, net of interest expense, increased 5% year over year to $1.4 billion, driven by higher merchant-related revenues.

Corporate & Other reported a net loss of $184 million compared with a net loss of $148 million in the year-ago period.

Financial Update

As of Jun 30, 2013, AmEx’s total assets stood at $152 billion (lower than $153 billion at 2012-end), while long-term debt totaled $53 billion (down from $59 billion at 2012-end) against cash of $23 billion (up from $22 billion at 2012-end). Meanwhile, shareholder equity totaled $19 billion at the end of the reported quarter, unchanged from 2012-end.

As of Jun 30, 2013, AmEx’ ROE was 23.6%, down from 26.6% in the year-ago period. Return on average common equity (ROCE) was 23.4%, declining from 26.3% in the prior-year quarter. Further, return on average tangible common equity was 29.7%, down from 34.1% in the comparable period last year. However, book value increased 4% year over year to $17.57 per share.

Capital Deployment Update

During the reported quarter, AmEx repurchased 19 million shares, at an average price of $72.60, for a total of about $1.38 billion. The company plans to repurchase shares worth $1.8 billion in the second half of 2013.

In Mar 2013, the board of AmEx replaced the previous share repurchase program with a new one with authorization to buy back 150 million shares. Management also disclosed its plans to buy back shares worth $3.2 billion in 2013, followed by another $1.0 billion of share repurchase in the first quarter of 2014.

Dividend Update

On Apr 30, 2013, the board of AmEx hiked its regular quarterly dividend by 15% or 3 cents to 23 cents per share. This is payable on Aug 9, 2013 to the shareholders of record as on Jul 5, 2013, and marks the second dividend hike by the company since Nov 2007.  In Mar 2012, this dividend was hiked by 11% from 18 cents, which was sustained even during the recession.

On May 10, 2013, AmEx paid a regular quarterly dividend of 20 cents per share to shareholders of record as on Apr 5, 2013.

Peer Take

AmEx’s peer, Visa Inc. is scheduled to release its fiscal third quarter results after the closing bell on Jul 24, 2013. Another peer, MasterCard Inc. is slated to announce its second quarter results before the market opens on Jul 31, 2013. While AmEx carries a Zacks Rank #3 (Hold), Visa,  MasterCard  and SS&C Technologies Holdings Inc. (SSNC) carry a Zacks Rank #2 (Buy).

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