American Express Co. ($AXP): Dividend M&A Assessment

Updated on

American Express Co. ($AXP): Dividend M&A AssessmentAs American Express Co. (NYSE: AXP) stock continues to rise in the wake of the Amex agreement with Wal-Mart Stores Inc. (NYSE:WMT) on Bluebird, CapitalCube assesses potential corporate actions by American Express. Does it make sense for the company to increase dividends? Can AXP benefit from making acquisitions?

CapitalCube’s analysis is peer-based. American Express Co. (NYSE:AXP) peer set comprises: JPMorgan Chase & Co.(JPM), Visa Inc. (V), Citigroup Inc.(C), Bank of America Corp.(BAC), MasterCard Inc. Cl A (MA), Capital One Financial Corp. (COF), Discover Financial Services (DFS), and Cielo S/A (CIEL3). For our Fundamental Analysis of AXP stock click here.

Corporate Actions

Dividend Action

While AXP-US has a medium quality dividend and a strong cash cushion, its relative operating performance is not strong enough to suggest an increase in the dividend.

Equity Action

The company’s current share price is not sufficiently lower than its 52-week high (currently about 5% below) and does not justify a share buyback as the best use of cash at this time.

M&A Action

While AXP-US’s size alone will not prevent it from becoming a target in this peer group, its share price could make it a relatively expensive acquisition.
AXP-US’s relatively small size (by book value) suggests that it would be tougher for it to be able to make meaningful acquisitions within this peer group.
Company numbers are TTM (trailing twelve months) or latest available. Share price data is previous day’s close unless otherwise stated.This report does not predict dividend or equity actions but highlights corporate actions that are supported by fundamental company performance and corporate finance principles.

Dividend Action

Dividend cut, increase or initiate?

In this section, we try to identify whether the company is likely to cut, increase or initiate a common stock dividend. In order to screen for these actions, we apply multiple tests to check whether the combination of operating performance, leverage, liquidity, growth expectations and share price performance is sufficient to permit such an action.
To check for a dividend increase at AXP-US, we look for outperformance relative to its peers in terms of pre-tax margin and operating cash flow. In addition, we also filter for relatively low leverage and good liquidity, which indicates sufficient support for debt servicing. We also look for a price to book value (P/B) that is positive, relatively low growth expectations (based on P/E) and a share price that has underperformed its peers. Overall, these conditions suggest that there is pressure on management to return money to the shareholders in the form of a dividend in order to increase their total returns. Finally, we overlay the dividend quality (medium or high) and ending cash dividend coverage (moderate or strong) to indicate whether the company is likely to increase its dividend.
Dividend Increase/Initiate Conditions AXP-US Comparable Pass/Fail
Dividend payout <= 100% (= 0% for initiate) 17.8 100 Pass
Pre-tax margin >= 1.2 x Peer median* 21.4 26.0 Fail
Free cash flow (% revenue) >= 1.2 x Peer median* 35.3 46.8 Fail
Interest coverage (by operating cash flow) >= 2.5x 7.1 2.5 Pass
Debt to market equity <= 1.2 x Peer median* 89.8 119.0 Pass
% below 52-week high share price >= 1.2 x Peer median* 4.7 5.6 Fail
Price to earnings (P/E) <= 1.2 x Peer median* 13.7 12.1 Fail
Price to book (P/B) >= 0 3.4 0 Pass
Dividend quality = Medium or High Medium Medium or High Pass
Ending cash/dividend >= 3 (Strong) or 1 (Moderate) Strong Strong or Moderate Pass
* We use a 20% tolerance (0.8-1.2x) around the median.
To check for a dividend cut at AXP-US, we look for underperformance relative to its peers in terms of pre-tax margin and operating cash flow. In addition, we filter for interest coverage that is somewhat tight, which combined with a low dividend quality and a weak ending cash cushion would suggest that a dividend cut is likely .
Dividend Cut Conditions AXP-US Comparable Pass/Fail
Pre-tax margin <= 0.8 x Peer median* 21.4 17.3 Fail
Free cash flow (% revenue) <= 0.8 x Peer median* 35.3 31.2 Fail
Interest coverage (by operating cash flow) < 2.5x 7.1 2.5 Fail
Dividend quality = Low Medium Low Fail
Ending cash/dividend < 1 (Weak) Strong Weak Fail
* We use a 20% tolerance (0.8-1.2x) around the median.
Fundamentals do not support a change in dividend policy in the near-term.
The combination of AXP-US’s operating performance and interest coverage does not seem to justify a dividend cut. Further, while the company has a medium quality dividend and a strong cash cushion (a healthy 26.5x the cash dividend), its relative operating performance is not strong enough to suggest an increase in the dividend.
Likely Dividend Action based on Dividend Support from Operations or Pre Tax Margin % vs Free Cash Flow (% Revenue) charted with respect to Peers for American Express Co. (NYSE:AXP)

Share Buyback

Is the company likely to buy back shares?

In this section, we identify whether AXP-US is likely to buy back its shares. In order to screen for this event, we look for positive free cash flows and good liquidity in addition to a leverage, an earnings multiple and a current share price that are low enough to suggest that there is some pressure on management to buy back shares. If the company pays a dividend, we also confirm that its ending cash balance is more than the cash dividend in order to highlight the greater priority of paying a dividend versus buying back shares.
Share Buyback Conditions AXP-US Comparable Pass/Fail
% below 52-week high share price >= 20% 4.7 20 Fail
Free cash flow (% revenue) > 0% 35.3 0 Pass
Interest coverage (by operating cash flow) >= 2.5x 7.1 2.5 Pass
Price to earnings (P/E) <= 1.2 x Peer median* 13.7 12.1 Fail
Debt to market equity <= 1.2 x Peer median* 89.8 119.0 Pass
Ending cash/dividend >= 3 (Strong) or 1 (Moderate) Strong Strong or Moderate Pass
* We use a 20% tolerance (0.8-1.2x) around the median.
AXP-US’s share price performance does not justify a share buyback as the best use of cash.
AXP-US’s current share price is not sufficiently below its 52-week high (currently 4.7% lower) and does not justify a share buyback as the best use of cash at this time. As a reference, the company’s cash balance is currently 34.8% of its market capitalization.
Likely Share Buyback based on Management Pressure or P/E vs. % Below 52-week High Share Price charted with respect to Peers for American Express Co. (NYSE:AXP)

M&A Action

Why merge or acquire?

Companies typically acquire to realize economies of scale, scope, gain customers, bundle complementary products, or gain vertical integration. From an investor’s perspective, these business reasons fall into natural screening categories that include: (a) buying companies to boost growth expectations; (b) buying to realize cost synergies; and (c) buying earnings through acquisitions that increase EPS.
Potential targets would typically be smaller than their peers though sometimes targets can be marginally larger than the acquirer. As a result, when identifying a company as a target, we check for a book value that is up to 80% more than the peer median. In addition, we also filter for a cheap valuation relative to peers (i.e. price to book is less than the peer median) and a share price that is trading sufficiently (i.e. at least 20%) below its 52-week high.
M&A Target Conditions AXP-US Comparable Pass/Fail
Book value <= 1.8 x Peer median 19,267.0 47,084.4 Pass
% below 52-week high share price >= 20% 4.7 20 Fail
Price to book (P/B) <= 1.2 x Peer median* 3.4 2.7 Fail
* We use a 20% tolerance (0.8-1.2x) around the median.
Typically, acquirers are larger than their peers though, as mentioned above, targets can sometimes be marginally larger than the acquirer. To identify a company as an acquirer, we look for a book value that is around or more than the peer median and for growth expectations (measured by its price to earnings or P/E) that are lower than peer median. In addition, we consider whether the company has the capacity to add intangible assets (like goodwill) and whether its valuation (measured by its price to book or P/B) is attractive relative to its peers.
M&A Acquirer Conditions AXP-US Comparable Pass/Fail
Book value >= 0.8 x Peer median 19,267.0 20,926.4 Fail
Price to earnings (P/E) <= 1.2 x Peer median* 13.7 12.1 Fail
Net tangible assets to equity >= 25% 100.0 25 Pass
Price to book (P/B) >= 0.8 x Peer median* 3.4 1.8 Pass
* We use a 20% tolerance (0.8-1.2x) around the median.
AXP-US’s share price could make it a relatively expensive acquisition in this peer group.
While AXP-US’s size (book value of USD19,267 million) alone will not prevent it from becoming a target in this peer group, its share price is not far from its 52-week high, which could make it a relatively expensive acquisition.

AXP-US has a relatively small book value and would find it hard to make meaningful acquisitions in this peer group.

At the same time, AXP-US’s relatively small size (by book value) within this peer group suggests that it would be tougher for it to be able to make meaningful acquisitions.

Leave a Comment