In its second attempt so far this year, American Express Co. (AmEx) succeeded in receiving approval for its capital plan for the next one year from the Federal Reserve (Fed). The last capital plan submitted in Jan 2013, before the outcome of the capital stress test, was rejected by the Fed as it was adversely impacting the company’s capital ratios.
Accordingly, AmEx has now received consent to hike its dividend by 15% and buyback shares worth $3.2 billion in the last three quarters of 2013 and another $1.0 billion in the first quarter of 2014. In the initial plan submitted in January this year, the company had proposed to repurchase up to $4.7 billion of stock in 2013.
However, the Fed disapproved and authorized a lower share buyback as it was contracting AmEx's Tier 1 ratios to 4.97% in one of the quarters. This would be below the minimum 5% as required by the Fed. Hence, AmEx can now buy back up to $3.2 billion in the last 9 months of 2013. An additional share buyback worth $800 million in the first quarter of 2013 was sanctioned in the capital plan of 2012.
Moreover, AmEx also intends to amplify its regular quarterly dividend payout by 15% to 23 cents per share from the current 20 cents. Previously, in Mar 2012, this dividend was hiked by 11% from 18 cents, which was sustained even during the recession period.
AmEx’s revised capital plan has been approved by the Fed but is yet to receive approval from the company’s board of directors before implementation.Subsequently, the latest capital plan strives to return about $4.0 billion of capital through share buybacks to shareholders in 2013, at par with the 2012-level.
On a cumulative basis, American Express has distributed 98% of capital generated through share repurchases and 66% through dividends and share buybacks since its inception in Dec 1994. Management aims over 25% of ROE and healthy capital ratios in 2013, in order 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.
Over the past years, AmEx has efficiently held a strong capital position with a Tier 1 risk-based common ratio of 11.9% at the end of 2012, 12.3% at 2011-end and 11.1% at 2010-end, all comfortably above the current regulatory requirement of 10% by Basel II and the final US capital rules.
Going ahead, we believe that AmEx’s spend-centric business model, improved credit trends, new business initiatives, capital flexibility and stable ratings warrant enhanced growth in a stable market over time.
We see no clear directional pressure on AmEx in the near term, which carries a Zacks Rank #3 (Hold). Other stocks in the financial sector that are outperforming are Moody’s Corp. , XL Group Plc and Euronet Worldwise Inc. . All these stocks carry a Zacks Rank #1 (Strong Buy).