Investors follow Warren Buffett's moves carefully, but he makes surprisingly few moves overall. A typical hedge fund has thousands of stocks that get traded frequently, but Berkshire Hathaway is a holding company with a different approach to its equity portfolio.
Warren Buffett has called himself a business picker, not a stock picker, and looks to maximize gains over the long term by investing in high-quality companies. He concentrates on a small number of stocks, typically around 45, that he has confidence in.
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American Express(NYSE: AXP) is one of Buffett's longest-held stocks, and it probably illustrates the classic Buffett model more than any other stock. If you're a Buffett fan, American Express will be right up your alley.
Why Buffett loves American Express
Buffett has owned American Express stock since 1995. Today, Berkshire Hathaway has a 21.5% stake in the company. While that's not a controlling stake, it demonstrates a strong influence.
American Express stock accounts for 15.4% of the total Berkshire Hathaway portfolio, the second-highest position after Apple. That came about only recently, since Buffett sold some Apple and Bank of America stocks. He grouped American Express with Coca-Cola as two stocks he'd never sell and hasn't sold a share of either one since purchasing them nearly 30 years ago.
Buffett has mentioned American Express' global brand as a moat that gives it a durable competitive edge. He said its core business has remained stable, shaped by trends over time and its products "traveled," because "the need for unquestioned financial trust [is a] timeless essential of our world.""
He has also praised its dividend, which has increased 169% over the past 10 years. Buffett loves dividends because they demonstrate commitment to creating shareholder value, which ultimately means the company is investing in itself. They're also a signal of a mature and well-established business and provide cash and opportunity.
Buffett said that the dividends Berkshire Hathaway received just from its original $1.3 billion investment in American Express stock has ballooned from $41 million in 1995 to $302 million in 2022 alone. It uses that money for all sorts of functions in its own business, and individual investors can use dividend payments as passive income.
Finally, Buffett loves bank stocks. That's partially due to the way they provide essential services, as mentioned above, but also because they usually have a lot of cash, which provides stability.
What it can do for you
Getting into the nitty gritty, American Express has proved its worth over the years as it adapts and changes to attract new cohorts while offering the same core, essential products. Having an American Express card used to be a status symbol since the company courts a high-income clientele. Today, the company has geared its marketing toward a broader population of younger, affluent clients who are willing to pay annual fees for American Express' top rewards program, which include flight and hotel extras, discounts at upscale retailers, and other fun perks.
This demographic accounted for 80% of new gold card signups in the third quarter. This pivot ensures that American Express will remain relevant as it grows along with its customers, and the annual fees create a strong relationship and reliable source of income.
The company has also rolled out a complete online banking business and a host of small business services, broadening its reach while it still does what it does best -- financial products.
American Express has a differentiated business model because, unlike competitors Visa and Mastercard, it funds it own credit cards. That gives it more control over its direction and is why it can target a niche, resilient consumer market. It also provides it with the benefits of being a bank and the cash that comes with that.
American Express has reported steady growth despite several years of macroeconomic volatility. It added 3.3 million new cardholders in the third quarter and has refreshed 40 cards so far this year to resonate with changing consumer needs.
The stock is resonating with investors and is up 63% so far this year, outperforming the market by a long shot. If you're looking for a classic Buffett stock that provides value and passive income with the potential for market-beating performance, American Express is a great choice.
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American Express is an advertising partner of Motley Fool Money. Bank of America is an advertising partner of Motley Fool Money. Jennifer Saibil has positions in American Express and Apple. The Motley Fool has positions in and recommends Apple, Bank of America, Berkshire Hathaway, Mastercard, and Visa. The Motley Fool recommends the following options: long January 2025 $370 calls on Mastercard and short January 2025 $380 calls on Mastercard. The Motley Fool has a disclosure policy.
