Dividend stocks are typically mature, established companies with low growth rates, but with the ability to generate significant amounts of cash that they pay out to shareholders. Unless an economic or industry-wide downturn occurs, solidly built companies are rarely tested on their ability to pay dividends. Sometimes companies are additionally structured to pay most of their profits to shareholders.
But this has not always been the case. Several companies have suspended or reduced their dividends following severe declines caused by the pandemic. disney, for its part, has still not restored it. However, resilient companies have maintained their dividends even in difficult economic conditions. American Express (AXP 0.41%) is a company that has increased its dividend for many years, and shareholders should expect it to hold up in any market.
Resilient clientele and tight management
American Express targets a wealthy clientele with a penchant for travel and leisure. It provides benefits in areas that attract cardholders and drive growth. At the start of the pandemic, when people who could afford to travel had no choice but to cut back on their travel and entertainment (T&E) spending, this strategy contributed to lower incomes. However, in a show of exceptional resilience, the company remained profitable even at its steepest declines, which were 29% year-over-year in Q3 2020. It quickly rebounded due to a rapid recovery non-T&E expenses and the company’s “strong underwriting and risk management capabilities”. The resilient consumer base and a tight management history have kept the company in great operational shape despite the challenges, although it did not increase the dividend in 2021.
The company quickly developed a strategic recovery plan to attract new customers through a credit card refresh program as well as offering new services for its small business solutions. These put it in an excellent position to return to growth as the economy recovers, and they are now helping American Express to successfully overcome the ongoing macroeconomic problems.
Successfully reach new customers
While most retailers have reported pressure in recent months, American Express saw phenomenal growth in the second quarter of 2022. Revenue grew 31% year-over-year to a record 13 .4 billion, with network volume up 25% to nearly $400 billion. Loss provisions, which are money set aside to cover write-offs, rose to $410 million after falling more than $600 million last year. That affects its net profit, which fell 14% to nearly $2 billion from $2.3 billion last year. Earnings per share of $2.57 beat analysts’ average estimate of $2.41.
There were tailwinds despite the generally stressed spending environment. These include the continued recovery in travel, particularly business travel, as well as an increase in goods and services, the largest business category. Platinum, gold and Delta Airlines The co-branded cards each achieved acquisitions. American Express card updates have attracted millions of new cardholders, especially in the target age groups of millennials and generation X. Management has steered the company in this direction to capture share market share in this cohort as its purchasing power increases. Spending for these categories increased by 48% in the second quarter. Investments to capture a share of this market have already paid off and should result in loyalty and increased spending in the future.
Management raised its outlook for the full year from 18% to 20% year-over-year revenue growth to 23% to 25%.
Where is the dividend now?
American Express’ dividend yields 1.35% at the current price, which is below the S&P 500 average of 1.59%. That’s partly because American Express stock is outperforming the S&P 500 this year and dividend yield is inversely correlated to stock price.
But the dividend itself continues to grow, increasing 160% over the past 10 years. It is also safe regardless of market conditions, making it an excellent choice for a safe dividend-paying stock in a diversified portfolio.
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 holds positions and endorses Walt Disney. The Motley Fool recommends Delta Air Lines and recommends the following options: January 2024 long calls at $145 on Walt Disney and January 2024 short calls at $155 on Walt Disney. The Motley Fool has a disclosure policy.