Dividend stocks are typically mature, established companies with low growth rates but the ability to generate ample cash that they pay out to shareholders. Unless there’s an economic or industry-wide downturn, solidly built companies are rarely tested for their ability to pay dividends. Additionally, sometimes companies are structured to pay out most of their profits to shareholders.
But that wasn’t always the case. Several companies have suspended or cut their dividends following severe pandemic-related declines. Disney, for one, it still hasn’t recovered. However, resilient companies maintained their dividends even in difficult economic conditions. American Express (NYSE:AXP) is a company that has been increasing its dividend for many years, and shareholders should expect it to hold up well in any market.
Resilient customer base and tight management
American Express caters to an affluent customer base with a love for travel and leisure. It offers perks in areas that attract cardholders and generate growth. At the start of the pandemic, when people who could afford to travel had no choice but to cut travel and entertainment (T&E) spending, this strategy contributed to a drop in revenue. In a show of supreme resilience, however, the company remained profitable even during its biggest declines, which came in at 29% year over year in the third quarter of 2020. It bounced back quickly due to a quick rebound in non-T&E spending and the company’s “robust underwriting and risk management capabilities.” The company’s robust consumer base and a history of lean management have kept it in excellent operating shape despite the challenges, though it didn’t increase its dividend in 2021.
The company quickly developed a strategic recovery plan to attract new customers through a credit card refresh program and to offer new services to its small business solutions. These put the company in an excellent position to return to growth as the economy recovers and are now helping American Express weather the ongoing macroeconomic woes.
Successfully reach new customers
While most retailers have reported squeezes in recent months, American Express has seen phenomenal growth in the second quarter of 2022. Revenue rose 31% year over year to a record $13.4 billion, with network volume rising 25% to nearly $400 billion. Loss provisions, the money set aside to cover write-downs, rose to $410 million after falling more than $600 million last year. That’s impacting net income, which fell 14% to nearly $2 billion from $2.3 billion a year earlier. Earnings per share of $2.57 beat the median analyst estimate of $2.41.
Despite the generally tense spending environment, there was tailwind. These include the continued resumption of travel, particularly business travel, and a surge in goods and services, the company’s largest category. US consumer platinum, gold and Delta Airlines Co-branded cards each achieved acquisitions. American Express card updates have attracted millions of new cardholders, particularly in the Millennial and Gen-X age groups. Management has steered the company in this direction to gain market share in this cohort as purchasing power increases. Spend across these categories increased 48% in the second quarter. Investing in gaining a share of this market has already paid off and should lead to loyalty and higher spending in the future.
Management raised its full-year guidance to 20% from 18%, with year-over-year revenue growth to 23% to 25%.
Where’s the dividend now?
American Express’s dividend yield is 1.35% at current prices, which is below the S&P 500 average of 1.59%. That’s partly because American Express stock has outperformed the S&P 500 this year, and dividend yield is inversely correlated with stock price.
But the dividend itself continues to grow, up 160% over the past 10 years. It’s also safe in all market conditions, making it a top choice for a safe dividend stock in a diversified portfolio.
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American Express is an advertising partner of The Ascent, a Motley Fool company. Jennifer Saibil has positions at American Express and Walt Disney. The Motley Fool has positions in and recommends Walt Disney. The Motley Fool recommends Delta Air Lines and recommends the following options: long January 2024 $145 calls on Walt Disney and short January 2024 $155 calls on Walt Disney. The Motley Fool has a disclosure policy.
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