American Express (NYSE:AXP) stock will get a great big boost from its recently announced 120 million share buyback program. Amex has 832 million shares outstanding now. So this represents over 14.4% of Amex stock total shares outstanding.
Depending on how long Amex takes to repurchase all these shares, there will be a commensurate lift in the AXP stock price. For example, this year Amex has bought back about 28 million shares, or 3.4% of its shares outstanding, based on my analysis of its 10-Q filing for Q2.
This includes 11.5 million shares which it has bought back during Q3.
In addition, I estimate that Amex will likely repurchase another 10 million shares during Q3 2019. That means its total 2019 buybacks will be 4.6% of its shares outstanding.
In fact, over the past 5 years, as you can see in the table below, Amex has bought back 5% of its shares annually.
So its buyback program, considered a return of capital by management to shareholders, will greatly help shareholders in several ways.
Amex Stock Will Benefit from Lower Shares Outstanding
Over time, the buybacks help push up the Amex stock since it reduces the supply of shares outstanding. For example, in the last 10 years, Amex has reduced its shares outstanding by almost 30%, including this year:
So strictly on a supply-to-demand basis, the stock will rise, with fewer shares outstanding. Another way Amex stock benefits is from increases in dividends per share.
Amex Stock Dividends Per Share Will Rise Faster
Amex stock rises when dividends per share are increased. Over the past 5 years, Amex’s dividends per share have increased by 10.9% on average. But the cost to Amex over that time has risen by only 5%. You can see this in the table below:
<em>Source: Hake estimates from SEC filings</em>
The reason why dividends per share have increased at over twice the rate as the cost of dividends is that Amex has lowered its share count so dramatically.
Another way to put this is that for the same amount of dividends Amex wants to pay each year, the dividend per share will rise faster with share buybacks.
So this is another real benefit that will help increase the AXP stock price. For example, at the same dividend yield, the stock will rise 10.9% on average with the increase in dividends per share at the same rate. But since the increase in dividends per share is so high, it is also possible that over time the dividend yield will improve as well, as Amex stock becomes more attractive to own.
Amex Stock Is a Clear Winner with its Buybacks
Buybacks are a controversial subject for some. For example, a recent Harvard Business Review (HBR) article by Harvard professors Jesse M. Fried and Charles C.Y. Wang, “Are Buybacks Really Shortchanging Investment?” addresses the criticisms that buybacks evoke in some people. This article deals with some of the false arguments that dividends and buybacks automatically reduce capital spending, R&D and employment gains by companies.
The HBR article shows that on a net basis, the amount of buybacks is not as high as claimed by critics. In addition, the article points out that capex and R&D spending has actually been increasing along with the spending on buybacks and dividends.
The truth is that AXP stock has a great record of return on investment for its shareholders. It made a 31.7% return on equity in the last 12 months. Therefore it makes perfect sense for its shareholders to buy back its stock.
The truth is that with its 1.48% dividend yield and the buyback yield of 5% (i.e. buybacks on average for the past 5 years as a percent of its market value). Therefore, Amex stock’s total yield is 6.48%. This means that 6.48% of Amex’s capital will be returned to its shareholders in the form of dividends and buybacks.
Expect Good News on Oct. 18
Amex presents its Q3 earnings on Friday. Expect that American Express will announce earnings per share of about $2.02, and increased share buybacks. This means the stock is trading at a relatively cheap 14 times its future earnings. Given the 6.5% total yield for Amex stock, this represents good value for shareholders.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here. The Guide focuses on high total yield value stocks, which includes both dividend and buyback yields. In addition, subscribers a two-week free trial.
