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Chenault’s Restructuring and Reward Plans, and Why Investors Aren’t Biting

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Mar. 15 2016, Updated 8:06 a.m. ET

Restructuring plans

American Express (AXP) CEO Kenneth Chenault announced a restructuring plan of $1 billion with its fourth quarter earnings. The plan is to cut costs by 2017 in order to improve efficiencies as overall business declines. Chenault offered few details on the cost-cutting plan in the company’s news release but said a number of cyclical factors in the broader economy had weighed on American Express’s performance.

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Moderate dividend yields

American Express’s adjusted net profits fell by 12% in 4Q15 on a strong dollar and increased competition. The company was impacted by the end of its 16-year partnership with Costco Wholesale (COST) as well as by the loss of a major antitrust case that removed restrictions on merchants that accept its cards. As a result, the company is deploying its operating cash flows in organic and inorganic expansions, investing in technology, and developing new partnerships. It’s also using cash flows to reward its shareholders through dividends and share repurchases.

American Express declared a dividend of $0.29 per share in 4Q15, up by 11.5%. This translates to an annualized dividend yield that is 1.8% higher than the industry average. The company’s peers have the following dividend yields:

  • Mastercard (MA)—0.7%
  • Visa (V)—0.7%
  • Discover Financial (DFS)—2.1%

Together, these companies account for 2.3% of the Technology Select Sector SPDR ETF (XLK).

Share repurchases

From time to time, American Express’s board of directors has approved the repurchase of up to 150 million common shares. The plan replaces the previous 150 million share repurchase program that had approximately 45 million shares of common stock remaining under board authorization. The company received approval for its capital plan from the Federal Reserve earlier in May 2015. During 2015, the company repurchased 56 million shares, which reduced the company’s average share count by 5%.

American Express generated a return on equity of 24.0% in 4Q15, compared to 29.1% in 4Q14. The company’s risk-based capital ratios were comfortable, with a Tier 1 ratio of 13.5% and a Tier 1 divided-by-risk-weighted assets of 12.4%.

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