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American Express Co. (AXP - Analyst Report), or AmEx, reported second-quarter 2014 operating earnings per share of $1.43, which outpaced both the Zacks Consensus Estimate of $1.38 by 3.6% and the year-ago quarter figure of $1.27 by 12.6%. With this result, the company’s average four-quarter beat stands at 1.9%.

The upside was primarily driven by a surge in consumer spending from AmEx cards and a lower share count. The company also recorded post-tax net gains of $409 million or 5 cents per share in the reported quarter from spin-off of business travel operations. However, the gains were partially offset by transaction-related costs, restructuring charges and contribution to AmEx Foundation. Consequently, net income from operations climbed 9% year over year to $1.53 billion from $1.41 billion in the year-ago period.

AmEx’ total billed business, or global card spending, continued to witness improvement in the U.S. and beyond increasing 9% year over year to $258.1 billion. The increase came from the cards used in the U.S. as well as internationally, both of which jumped 9% each to $173.4 billion and $84.7 billion, respectively.

Behind the Headlines

AmEx posted total revenue, net of interest expenses, of $8.66 billion, up 5% year over year although it missed the Zacks Consensus Estimate of $8.67 billion. The year-over-year upside in revenues was supported by healthy growth in card fees, net interest income and the loan portfolio. Further, higher yields and strong credit indicators were partially offset by lower lending balances.

However, provisions for losses fell 6% to $489 million, driven primarily by lower net write-offs in the reported quarter, partially offset by an unfavorable comparison with a larger reserve release in the year-ago quarter.

AmEx’s total expense edged up 2% year over year to $5.86 billion in the reported quarter, primarily reflecting upsides in operating and marketing expenses along with higher   card member rewards. Tax rate was 33.9% against 29.6% in the year-ago quarter.

Segment Results

U.S. Card Services reported net income of $770 million, up 4% from $743 million in the prior-year quarter. Total revenue, net of interest expenses, increased 6% to $4.5 billion.

International Card Services net income amounted to $77 million, decreasing 63% from $208 million in the year-ago quarter, primarily due to higher restructuring charges and incremental investments. However, total revenue, net of interest expenses, came in at $1.4 billion, up 7% year over year, driven by higher cardmember spending and revenues from Loyalty Partner business.

Global Commercial Servicesnet income surged to $561 million from $226 million based on the gains from spinning off business travel operations. Moreover, total revenue, net of interest expenses, improved 3% year over year to $1.3 billion, reflecting higher spending by card members.

Global Network & Merchant Services reported net income of $373 million, down 9% from $412 million in the prior-year quarter. However, total revenue, net of interest expenses, rose 5% year over year to $1.5 billion, driven by higher merchant-related revenues.

Corporate & Other reported net loss of $252 million, widening from net loss of $184 million incurred a year ago.

Financial Update

As of Jun 30, 2014, AmEx’s total assets were $152 billion (down from $153 billion at 2013-end), while long-term debt totaled $55 billion (unchanged from 2013-end level) against cash of $18 billion (down from $19 billion at 2013-end). Meanwhile, shareholder equity amounted to $20 billion at the end of Jun 2014, up from $19 billion at 2013-end.

As of Jun 30, 2014, AmEx’ return on equity (ROE) was 28.8%, up from 23.6% in the year-ago period. Return on average common equity (ROCE) was 28.5%, increasing from 23.4% in Jun 2013. Further, return on average tangible common equity was 35.8%, up from 29.7% in the comparable period last year. Further, book value increased 10% year over year to $19.32 per share.

Capital Deployment Update

During the reported quarter, AmEx repurchased 13 million shares, at an average price of $90.30, for a total of about $1.17 billion.

On May13, 2014, the board announced a 13% dividend hike to 26 cents a share from 23 cents.This marks the third dividend hike by the company since Nov 2007. The raised dividend will be paid on Aug 8, 2014 to shareholders of record as on Jul 11.

On May 9, 2014, AmEx paid a regular quarterly dividend of 23 cents per share to shareholders of record as on Apr 4.

Approximately 87% of the capital generated was distributed to shareholders through dividend payouts and share repurchases in second-quarter 2014.

Additionally, AmEx aims to buy back shares worth about $2.3 billion in the second half of 2014 (totaling $4.4 billion in 2014), while another $1.0 billion of repurchases are projected in first-quarter 2015.

Guidance

In Jan 2014, management disclosed its aim of keeping operating expense growth under 3% in 2014.

Zacks Rank

AmEx currently carries a Zacks Rank #2 (Buy).

Peer Take

AmEx’s peer, Discover Financial Services (DFS - Analyst Report) reported second-quarter 2014 operating earnings of $1.35 per share last week. The figureexceeded the Zacks Consensus Estimate by a nickel and rose 13% from the year-ago quarter. The stellar results were primarily driven by loan growth and share repurchases.

Another rival, Visa Inc. (V - Analyst Report) beat on its fiscal third-quarter earnings last week, thanks to lower expenses. The company reported operating earnings of $2.17 per share, outpacing the Zacks Consensus Estimate of $2.09 and the prior-year quarter figure of $1.88 per share.

On Jul 31, MasterCard Inc. (MA - Analyst Report) is slated to release second-quarter results before the opening bell.

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