AmEx to Raise Investor Wealth

Basking after an impressive quarter, American Express Co. ( AXP - Analyst Report ) (AmEx) announced its intention of buying back shares worth $5 billion within two years, besides initiating about an 11% hike in its regular dividend to 20 cents from the prior 18 cents.

The resolution of a hefty buyback and dividend hike comes after the US Federal Reserve (Fed) passed most of the banks in the annual capital stress-test yesterday, with flying colours. Accordingly, the Fed appeared satisfied about the capital requirement and holding of most of the top banks in the US such as AmEx, JP Morgan Chase &Co. ( JPM - Analyst Report ) , Morgan Stanley ( MS - Analyst Report ) , Bank of America Corp. (BAC), Goldman Sachs Group Inc. (GS), Bank of New York Mellon Corp. ( BK - Analyst Report ) , State Street Corp. ( STT - Analyst Report ) , BB&T Corp. ( BBT - Analyst Report ) , U.S.Bancorp. ( USB - Analyst Report ) and Wells Fargo & Co. ( WFC - Analyst Report ) , thereby validating their capital transparency. Only 15 out of 19 banks passed the stress test with high grades.

AmEx's Capital Strong

Meanwhile, AmEx enjoys a strong capital position with a Tier 1 risk-based common ratio of 12.3%, at the end of 2011, well above the current regulatory requirement. Armed with excess cash and securities of $18 billion at 2011-end along with improved deposits and ROE have also paved way for resumption of share repurchases in the third quarter of 2011. Thenceforth, the company bought back shares worth $2.3 billion in 2011, thereby distributing about 56% of capital generated through share repurchases and dividend payments.

On a cumulative basis, since 1994, the company has distributed about 64% of capital generated through share repurchases and dividends. The latest acknowledgement from the Fed that AmEx’s capital flexibility should continue to remain intact even post the capital deployment through share repurchases and dividend has further backed the company’s projection to continue with the share repurchase activity in 2012 more aggressively.

Besides sustaining over 25% ROE growth, going ahead, management expects to consistently invest 50% of its excess capital in the business while paying out the remaining 50% to the investors through dividends and share buybacks. Hence, according to a regulatory statement filed by AmEx, the company anticipates to repurchase about $4 billion of common stock in 2012, while the remaining $1 billion of the buyback package is expected to be completed in 2013. Nevertheless, share repurchases will be dependent on the market conditions, the company’s business developments and operating performance in the upcoming quarters.

Industry Moves

Consequently, other banks like JP Morgan, BB&T, Wells Fargo, Morgan Stanley, Goldman Sachs and Discover Financial Services ( DFS - Analyst Report ) have also raised the amount of capital to be distributed to their shareholders, thereby showcasing healthy capital flexibility since the downturn in 2008. The banks are on the path to attain stability. However, four banks – MetLife Inc. ( MET - Analyst Report ) , SunTrust Banks Inc. ( STI - Analyst Report ) , Citigroup Inc. ( C - Analyst Report ) and Ally Financial failed to meet all the Fed criteria in the stress test.

Particularly, MetLife has condemned the Fed for disapproving the company’s capital plan of repurchasing stock worth $2 billion and hike its dividend to $1.10 per share from the current 74 cents. Although the company had excess capital worth $3.5 billion at 2011-end, which is expected to grow to $6–7 billion by the end of 2012, the Fed remains cautious of MetLife based on its bank holding company status.

However, MetLife is consistently and vigorously working toward its plan of shedding the banking status by the end of the second quarter of 2012. In a bid to achieve this, the company has already wound down the forward mortgage business of MetLife Bank, while the sale of its depository and warehouse finance businesses are also on the cards.

Our Take

Fundamentally, AmEx has been driving its growth profile through improved credit quality. Alongside, the company has been upgrading its digital payment platform through strategic alliances, which will not only expand the company’s card membership base but also help it penetrate the unexplored market and tap the upcoming opportunities in the field of eCommerce.

Although increasing regulatory compliances, low interest rates and higher expenses are weighing on the net interest income and margins, we believe the long-term outlook remains firm for AmEx. Based on the current market volatility, the Zacks Rank for AmEx currently stands at #3, implying a short-term Hold and a long-term Neutral stance.