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American Express: One of Wells Fargo’s Top Picks
Stock Analysis & Ideas

American Express: One of Wells Fargo’s Top Picks

American Express (AXP) is one of America’s longest-existing and most well-branded consumer finance companies. I am bullish on the stock.

Wells Fargo’s Bullish Call

Donald Fandetti of Wells Fargo (WFC) recently made a bullish call on financial stocks, linking the growing consumer base in the U.S. and milder pandemic restrictions to progress within the consumer finance space.

Fandetti was quoted saying: “The U.S. consumer remains healthy, and there is still a lot of pent-up demand.” He added the following with regards to the pandemic: “While the Delta and Omicron variants have slowed the stock progression recently, earnings and card spend have marched upward. Their weighting largely to domestic U.S. consumer and small business has shielded them from the more challenging cross border travel environment.”

Fandetti upgraded American Express, among other stocks. His upgrade to overweight is well justified if we look at the company’s most recent quarterly numbers.

American Express’ sales numbers increased by 24.9% year-over-year; this was driven by a non-net interest income surge worth 29.8%, an interest income increase worth 6.4%, and an improvement in reserve releases as credit losses eased along with the economic recovery.

The outlook for American Express should be positive, with global GDP growth expected to be robust at 3.8%; consumer sentiment could also pick up as certainty about future income becomes clearer, which could add significantly to credit card transaction volume.

Possible Dividend Growth

American Express recently declared and paid a per-share dividend worth $0.43 per share at a yield of 1%. The firm has the capacity to increase its dividends going into 2022 if we consider its dividend safety metrics.

The firm’s cash from operations is 29.2% higher than its five-year average. Many investors think it’s all about the net income margins when it comes to assessing dividends, but cash flows are actually a better indicator of dividend capacity because they account for timing accruals.

Furthermore, American Express’ dividend coverage ratio is 29.5% better off than its five-year average, and the dividend payout ratio is 66.56% below its five-year average.

The two data points combined suggest that American Express is in a prime spot to increase its shareholder compensation if it chooses to do so instead of reinvesting most of its capital.

Wall Street’s Take

Turning to Wall Street, American Express has a Moderate Buy consensus rating, based on six Buys, seven Holds, and one Sell assigned in the past twelve months. The average American Express price target of $188.62 implies 8.5% upside potential.

Concluding Thoughts

American Express stock is in a good spot after an upgrade from Wells Fargo. The company is set to benefit from continued strength in the consumer finance space, and loosening COVID-19 policies could also add to its success. The stock hasn’t been the best of dividend plays over the years, but I won’t be surprised if it upgraded its payouts in 2022, considering its encouraging capacity metrics.

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