In a year where market trends have surged—specifically, the S&P 500 and Nasdaq Composite witnessing approximately 15% and 14% increases—it can be challenging for investors to identify stocks that offer long-term value without exorbitant valuations. Amidst this backdrop, one strategy for savvy investors is to consider high-quality companies that provide dividends likely to increase consistently over time. Not only do dividends help mitigate risk by returning cash to shareholders, but companies that maintain a strong dividend outlook are often rooted in profitability and resilience, enhancing their potential for long-term returns through stock appreciation.
A standout in this regard is American Express (NYSE: AXP). This company exemplifies robust financial health and consistent earnings, showcasing its ability to thrive even in turbulent economic climates. For example, during the second quarter, American Express experienced an 8% rise in revenue year-over-year—adjusted, this figure jumps to 9%. Most notably, the company’s earnings per share skyrocketed by an impressive 44%.
American Express’s unique business structure excels at generating profit, regardless of economic fluctuations. When consumer spending patterns slow, as often happens during challenging times, the company’s reward expenses decrease, enhancing profitability. Conversely, when consumer spending tightens, American Express benefits from increased loan balances, leading to higher interest income. Its high-spending cardholders demonstrate resilience, showcasing delinquency rates that other financial companies would envy.
An integral part of American Express’s business model is its growing fee revenue. The popular premium cards offered by the company come with high annual fees but deliver unparalleled membership experiences for customers. This strategy has proven exceptionally successful, as evidenced by a 16% increase in net card fee revenue in the second quarter, primarily driven by the acquisition of new premium accounts.
Beyond financial performance, the firm is dedicated to returning value to its shareholders through dividends. Recently, American Express raised its quarterly dividend to $0.70—a more than 8% increase compared to previous payouts. Annualized, this brings the total dividend to $2.80, resulting in a dividend yield of 1.1%. Over the past three years, the quarterly payment has surged by 63%, underscoring the company’s commitment to sharing profits with its investors.
Looking forward, American Express is on track to continue this trend of dividend growth, supported by a low payout ratio of 19%. This conservative stance, combined with ongoing earnings expansion, positions the company favorably for future dividend increases. The stock is considered reasonably valued at around 19 times earnings, making it an attractive option for potential investors today. With a solid earnings trajectory and appealing valuation metrics, those who invest now might enjoy significant share price growth in the future.
While American Express’s stock may face challenges, especially in the event of a recession—with discretionary spending taking a hit—the overall risk-reward equation remains compelling. Investors willing to withstand short-term volatility might find that American Express stock could deliver substantial returns as the economy rebounds.
For those contemplating an investment of $1,000 in American Express, it’s essential to weigh the potential benefits and risks. While American Express appears to be a solid choice, it is not among the top ten stock recommendations identified by the Motley Fool’s Stock Advisor team. These alternative picks may provide exceptional returns in the years ahead.
In conclusion, while American Express represents a sound investment rooted in strong operational fundamentals and a dynamic fee-driven model, diversifying one’s portfolio by considering other high-potential companies could also lead to remarkable financial outcomes. Stock Advisor is known for providing investors with actionable insights and a robust portfolio-building strategy—integral for navigating today’s dynamic market landscape effectively.