The Motley Fool: American Express deals with the cost of losing Costco
Shares of American Express (NYSE: AXP) dropped more than 20 percent in 2015, presenting an intriguing buying opportunity. The company didn’t have the best year, facing currency-exchange headwinds and the end of a long-term lucrative contract with Costco. American Express’ co-branded credit card had been the only one accepted at the store, and about 8 percent of all American Express transactions were with those cards. It was a big loss.
It’s not all over for the 166-year-old company, though. It has deep pockets, with about $20 billion in cash and cash equivalents, and more than $9 billion in annual free cash flow. Its net profit margins top 15 percent, and its dividend, which recently yielded 1.7 percent, has lots of room to grow. (Indeed, it has grown by more than 60 percent in just the past five years.)
It might take a while for American Express to find new income streams, but it retains advantages over rivals, such as how it acts as both a lender and processor. When the global economy is growing, this allows it to pump up its profits at a faster rate than some of its peers – though the opposite is possible during downturns, if loan delinquencies increase and hurt its bottom line. American Express also boasts more affluent consumers who tend to spend more. (The Motley Fool has recommended American Express.)
Ask the Fool
Q: Has Wal-Mart not split its shares since 1999 because it has too many shares already? – P.B., Honolulu
A: Splitting shares is more about changing the price of shares than the number of shares, though that changes, too. Splits often take place when a stock’s price is deemed too high – perhaps seeming prohibitive to less affluent investors. (A single share of Priceline, for example, recently topped $1,200, while Google and AutoZone shares topped $700 and Amazon shares topped $600.) Since the stock of healthy, growing companies will increase in value over time, if stocks never split, a single share of some big companies would cost as much as a car or house.
Wal-Mart has more than 3 billion shares, but the number of shares isn’t a measure of a company’s size. Zynga, maker of online games and apps such as Words With Friends and Farmville, recently had more than 900 million shares outstanding and a market value near $2.5 billion, while the far bigger game company Hasbro had a market value north of $8 billion and just 127 million shares. Priced near $60 per share, Wal-Mart probably won’t split its shares anytime soon.
What matters much more than stock splits or numbers of shares is how strong a company is, how quickly it’s growing, how successfully it’s competing and how each share’s value is increasing. Hasbro is currently far healthier than Zynga.
Q: How can I learn the percentage of a company’s stock held by insiders? – G.V., Hattiesburg, Mississippi
A: You can just call the company and ask its investor relations department for the information. Alternatively, click over to finance.yahoo.com, search by the company’s ticker symbol, then click on “Major Holders.”
My dumbest investment
My dumbest investment was buying stock in Enron. I saw good numbers, good recommendations, a good reputation, great returns and more – but it all turned out to be a lie. – Jeff S., online
The Fool responds: Many investors got burned by Enron, and not just inexperienced ones, either. With its convoluted financials and seemingly strong performances, it fooled many seasoned investors and Wall Street stock analysts, too.
The company began in the steady natural-gas pipeline business, but to grow faster and make more money, its management had the company take on a lot of debt – and then covered up some of it, to look less risky, while inflating profitability.
Enron pulled off its financial shenanigans by using elaborate and complex corporate structures and partnerships – ones few understood. When these debt-laden outside structures were revealed, Enron was exposed as having overstated earnings, leading it to eventually file for bankruptcy protection.
A key lesson here is that we would do well to stick to companies and businesses we understand. Sticking to companies with managements we trust is also smart. It can be hard to figure out whom to trust, but reviewing annual letters to shareholders is a good place to start, asking yourself how candid management is being and how clear. The Enron story is also a reminder of the importance of diversification, so that one company’s implosion can’t hurt you too much.