AmEx to Raise Investor Wealth - Analyst Blog
March 14 2012 - 7:45AM
Zacks
Basking after an impressive quarter, American Express
Co. (AXP) (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), Morgan
Stanley (MS), Bank of America Corp.
(BAC), Goldman Sachs Group Inc. (GS), Bank
of New York Mellon Corp. (BK), State Street
Corp. (STT), BB&T Corp. (BBT),
U.S.Bancorp. (USB) and
Wells Fargo & Co. (WFC), 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) 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), SunTrust Banks Inc. (STI),
Citigroup Inc. (C) 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.
AMER EXPRESS CO (AXP): Free Stock Analysis Report
BANK OF AMER CP (BAC): Free Stock Analysis Report
BB&T CORP (BBT): Free Stock Analysis Report
BANK OF NY MELL (BK): Free Stock Analysis Report
CITIGROUP INC (C): Free Stock Analysis Report
DISCOVER FIN SV (DFS): Free Stock Analysis Report
GOLDMAN SACHS (GS): Free Stock Analysis Report
JPMORGAN CHASE (JPM): Free Stock Analysis Report
METLIFE INC (MET): Free Stock Analysis Report
MORGAN STANLEY (MS): Free Stock Analysis Report
SUNTRUST BKS (STI): Free Stock Analysis Report
STATE ST CORP (STT): Free Stock Analysis Report
US BANCORP (USB): Free Stock Analysis Report
WELLS FARGO-NEW (WFC): Free Stock Analysis Report
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