At the time of writing, Berkshire Hathaway has joined the ranks of the trillion-dollar club, becoming one of the select few companies to achieve this milestone. Warren Buffett’s conglomerate not only fully owns a multitude of businesses across various industries but also boasts an enormous portfolio of public equities.
While Apple often garners significant attention, there’s another financial stock, currently Berkshire’s second-largest holding, that investors should be aware of. Remarkably, the Oracle of Omaha now holds more than a 21% stake in this company.
Read on to discover which business this is and whether it deserves a place in your personal investment portfolio.
A Strong Competitive Position
Buffett is well-versed in the financial services industry, given his substantial investments in the sector. Therefore, it’s significant that his company maintains such a large stake in American Express, the credit card issuer, and payments processor. Berkshire has been a shareholder since the 1990s, and the reasons are clear.
American Express stands out as a high-quality business with a formidable economic moat that safeguards its competitive edge. Several factors contribute to this. The company’s premium cards, like the Centurion Black Card, the Platinum Card, and the Gold Card, have solidified American Express as a highly reputable brand. These cards, with their high annual fees, offer impressive perks and rewards, attracting a more affluent clientele.
Moreover, these cardholders generally present a lower credit risk compared to the average consumer. This accounts for Amex’s typically lower charge-off rates compared to competitors like JPMorgan Chase, Bank of America, and Capital One. In challenging economic times, Amex is better positioned to withstand financial difficulties.
Network effects further bolster Amex’s competitive advantage. Similar to Visa and Mastercard, the company operates the communications infrastructure that facilitates transaction processing. As the network expands, its value to all stakeholders increases, creating a positive feedback loop. For instance, merchants aiming to boost sales are more inclined to accept Amex transactions due to cardholders’ higher spending capacity. With more businesses supporting the card and its exceptional benefits, more consumers are drawn to becoming Amex customers.
Warren Buffett values businesses with strong economic moats, which likely explains why Berkshire maintains such a significant stake in American Express.
Amex’s Valuation
Over the past five years, Amex’s shares have delivered a total return of 131%, surpassing the S&P 500’s 107% gain during the same period. This impressive performance is noteworthy. Currently, the stock trades at a price-to-earnings (P/E) ratio of 19.2, marginally higher than its average P/E multiples over the trailing three, five, and ten years. Consequently, it seems reasonable to suggest that the stock may be fully valued.
For investors who are meticulous about the P/E ratio they pay for a stock, Amex might not seem appealing at the moment. However, for those less concerned with valuation, owning a business admired by Buffett and with a recent history of market outperformance may sound enticing.
While I value paying a fair price, I believe Amex is an exceptional business worthy of closer consideration for your portfolio. The company’s track record of robust revenue and earnings growth suggests it could continue to be a successful investment.
