How Warren Buffett’s Berkshire Hathaway Came to Own 20% of American Express

American Express (AXP), one of the world’s leading credit card companies, has long been a favorite of Berkshire Hathaway (BRK-A, BRK-B) CEO Warren Buffett.

“You can’t create another American Express,” Buffett told Bloomberg in December. “I could start another shoe store. I could start another trade publication. I could do all kinds of things with hundreds of billions of dollars. But I can’t get into people’s minds what they think about American Express.”

As of September 29, 2022, Berkshire held 151,610,700 AmEx shares, or 20.29% of the total. At the end of 2021, AmEx was Berkshire’s largest stock holding by weight and third-largest holding by market capitalization, with a share valued at $24.8 billion, which has grown to $26.1 billion by 29 September 2022.

In 2022, Berkshire built at least a 20.2% stake in Occidental Petrleum (OXY) and won regulatory approval to buy up to 50% of the oil giant’s common stock. So while AmEx may no longer be Berkshire’s largest holding by weight, the company’s value to Berkshire is clear.

“It’s kind of a seal of approval from Good Housekeeping,” American Express CEO Stephen Squeri recently told Yahoo Finance. direction that we are going with such enthusiasm [is important].”

In 2020, when the pandemic hit, AmEx shares dropped as low as $66 as lockdowns and travel bans slashed profits by 39%. But Buffett kept his stake in the company, even as he sold shares in airlines and banks.

AmEx was able to recover after enduring the COVID-induced economic downturn and hit its highest price in decades at $196 per share in 2022.

That momentum continued into 2023: AmEx’s latest quarterly results showed a slight miss for the fourth quarter, but the company has indicated it remains positive about its outlook for the remainder of the year.

NEW YORK, NY - SEPTEMBER 19: Warren Buffett attends Forbes Media's Centennial Celebration at Pier 60 on September 19, 2017 in New York City.  (Photo by Taylor Hill/FilmMagic)

Warren Buffett attends the Forbes Media Centennial Celebration at Pier 60 on September 19, 2017 in New York City. (Photo by Taylor Hill/FilmMagic)

Like Buffett acquired his stake AmEx

While the AmEx brand has emerged from the pandemic in a strong position, this has not always been the case.

Buffett’s interest in AmEx began in the 1960s, during the first wave of consumer lending via banks. For American Express, it hasn’t been without controversy.

In 1963, Anthony De Angelis, the founder of Allied Crude Vegetable Oil Company, used his company’s inventory as collateral for loans from more than 50 companies, including AmEx. De Angelis used these loans to raise prices in the soybean oil market and increase the value of Allied.

Eventually, a whistleblower came forward claiming that Allied was tricking AmEx into getting more loans by filling oil tanks with water. This proved to be true and De Angelis filed for bankruptcy and went to prison for seven years. The irregularity became known as the “salad oil scandal” and raised concerns on Wall Street as AmEx now had to foot Allied’s bill.

“Every trust department in the United States panicked,” Buffett said of the scandal. “I remember Continental Bank owned over 5% of the company and suddenly they saw that not only did the trust accounts have zero value stock, they could be valued. The stock just poured in, of course, and the market it became slightly inefficient for a short period of time.”

Buffett used the opportunity to acquire 5% of AmEx for about $20 million.

The credit card boom of the 1970s and 1980s made AmEx a major player in the market. In the late 1990s, two-thirds of American households had a credit card. Buffett could now go all out and make his first big stake in the company in 1991 with $300 million.

In seven years, Buffett owned more than 50 million shares of the company. Berkshire Hathaway has not bought shares in American Express since the late 1990s, but its stake in AmEx has continued to increase as a result of stock buybacks.

Between 1998 and 2005, Berkshire’s share rose from 11.2% to 12%. In 2020, AXP became Berkshire’s largest percentage holding.

And even though AmEx had a rough start to 2016 financially, Buffett has stood by his investment.

“We now own 20% of American Express,” Buffett said at Berkshire Hathaway’s 2022 annual meeting of shareholders. “It seems to have worked out very well. If they overpaid for stock and all that, it doesn’t solve all the problems, but it’s a wonderful thing if you have an asset you like and they increase your ownership stake.

The pandemic renewal of AmEx

One of American Express’s greatest assets has been its perception as a status symbol, which has endured after undergoing a series of rebranding attempts.

The company has a simple revenue model: Most of its revenue is generated by interest from balances and fees by cardholders and merchants. Merchants pay more than AmEx competitors such as Visa (V) or Mastercard (MA) because AmEx cardholders tend to be wealthier and spend more, which benefits merchants across the board.

AmEx also collects revenue from data collected on cardholder spending, which is used to drive marketing and provide offers to customers. This, in turn, has helped AmEx capture the interest of millennial and Gen Z consumers in recent years as the company has evolved from being a traditional provider of luxury credit cards to a provider of digital payments. .

AmEx rebranded its Platinum card as a “lifestyle card” by ramping up its rates and at-home benefits, and dived into e-commerce and food delivery services by ramping up rewards. Since the strategic changes took effect, the company has doubled the number of Platinum cardholders, with Millennial and Gen Z customers accounting for approximately 60% of all new consumer cardholder growth.

And with pandemic restrictions lifted, AmEx has expanded its global reach with new travel benefits. They offered more rewards, points and a new luxury Centurion airport lounge. AmEx’s payment method is now accepted on most websites in more than 178 countries, according to Statista.

“The whole concept of generational relevance is huge for us,” Squeri told Yahoo Finance. Millennials and Gen Zers are the fastest growing segment we have.”

The AmEx CEO also stressed that Buffett “is right” as AmEx’s largest shareholder.

“He understands that the AmEx brand is special,” he said. “He always tells me that. We both agree that the customer base is special. Anyone who has Warren as a major shareholder would be pretty happy.”

Tanya is a data reporter at Yahoo Finance. Follow her on Twitter. @tanyakaushal00.

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