American Express Company (AXP) Hikes Dividend, Buys Back More Stock

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American Express Company (NYSE:AXP) is up more than 1% this morning as the company announced a new share repurchase plan, hiked its dividend and won a major case against merchants.

AXP Stock: American Express Rises on Stock Buyback, Dividend Hike

The dividend first: AXP stock will now throw off a yield of more than 2%, paying a quarterly dividend of 32 cents (up from 29 cents previously).

The 10% higher dividend will be payable on Nov. 10 to stock holders of record as of Oct. 7.

The venerable credit card company also introduced a stock buyback plan of 150 million American Express shares. This comes on top of the company’s previous buyback plan of 150 million, where 50 million shares remain.

That values the new plan at around $9.5 billion and marks the fourth consecutive annual dividend increase for AXP stock holders, as the company maintained its dividend at 18 cents during the financial crisis and subsequent recovery.

Some investors, however, may worry about the cash flow at American Express, which has declined slightly over the last few years. In the second quarter of 2015, AXP generated about 83% more free cash flow than it did in Q2 of 2016. While the company has also issued slightly more debt year-over-year, it’s also nearly paying about 90% less to knock down that debt.

That all sounds bad on the face of it, but American Express must be doing something right to hike its dividend, right?

The Good News for AXP Stock

Sure enough, the firm’s long-term debt is down about 20% since 2011. Meanwhile, AXP has grown per-share earnings from $1.43 in the year-ago period to $2.11 in its last report.

But the cash picture is where things really shine: AXP stock had about $33.8 billion in the bank at the beginning of its second quarter, compared to $21 billion in the year-ago quarter. And with a healthy payout ratio of around 22%, it can hike its dividend relatively painlessly.

And its financials are fundamentally set to improve further, as AXP recently won a case against merchants to prevent them from recommending competitors, such as Visa Inc (NYSE:V) and Mastercard Inc (NYSE:MA), who charge lower transaction fees. According to KBW analysts:

“We think today’s ruling is a positive for American Express as it seems that investors were concerned about the negative impact of potential steering and the ability for the networks to create an environment where merchants would want to steer more frequently.”

American Express Company next reports earnings on Oct. 19, which is where we’ll get our next clearest signal to whether AXP stock can continue matching the 11% gains it has put up over the last three months.

As of this writing, John Kilhefner did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/09/american-express-dividend-axp-stock-buy/.

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