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American Express Generates Consistent Revenue Growth and Returns

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Consistent returns on equity

American Express’s (AXP) return on equity, or ROE, has consistently been above 20% for the last five years. MasterCard’s (MA) ROE averaged more than 40% during the same period, and Visa’s (V) was ~14%. Discover Financial (DFS), too, has had an ROE that’s been consistently greater than 20% these last four years.

All big banks, including J.P. Morgan (JPM), Bank of America (BAC), and Citigroup (C) have much lower ROEs.

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Stable revenue growth

American Express has demonstrated consistent revenue growth over many years. Its revenues have grown at a compound average growth rate of 6% since 2010. The above chart shows the company’s quarterly revenue and net income growth.

Its revenue growth was driven by an increase in both card member spending and the number of card members. Average basic card member spending increased from $13,259 in 2010 to $16,884 at the end of 2014. Total cards-in-force increased to 112.2 million at the end of 2014, up from 91 million in 2010.

Longer-term financial targets

These are the company’s longer-term financial targets:

  • EPS (earnings per share) growth of 12% to 15%
  • revenue growth of at least 8%, net of interest expense
  • return on average equity of 25% or more

If the company achieves its EPS and ROE targets, it intends to return on average and over time approximately 50% of the capital generated to shareholders as dividends or through the repurchases of common stock.

American Express forms ~2.6% of the Financial Select Sector SPDR Fund (XLF).

In the next part of this series, we’ll take a closer look at American Express’s stock price movement and what might impact it in the near term.

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