In recent quarters, Warren Buffett and his team have added Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) have made headlines by consistently selling more shares than they bought. Buffett’s decisions to offload significant portions of his Apple And Bank of America Positions have, among other things, led to much speculation about how the Oracle of Omaha views the market’s current high valuations.
According to Berkshire’s 13-F filing with the Securities and Exchange Commission for the third quarter, the conglomerate sold more than 235 million shares of Bank of America. The megabank has been part of her portfolio since 2011, but the sales have dropped her to Berkshire’s third-largest stock holdings.
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That leaves American Express (NYSE:AXP) in second place. Berkshire has owned American Express for three decades now and will likely remain a core holding in its portfolio in the long term. This is why.
American Express’s corporate history goes back 174 years, but it only entered the credit card market in the 1950s. Under the leadership of then-CEO Ralph Reed, the company strategically positioned its card as a premium offering by setting its annual fee $1 higher than that of rival Diner’s Club.
Over the years, American Express’ strong brand has attracted a high-spending premium customer base. A great example of the high-end brand strategy is the invitation-only Black Card, which reportedly requires $250,000 in annual spend and a $5,000 annual fee.
It also offers a more affordable (but still pricey) Platinum Card with an annual fee of $695. That card is intended to appeal to high-spending consumers with benefits such as access to airport lounges, hotel perks, travel rewards and spending credits for dining and entertainment.
This strong brand is why Buffett and his right-hand man, the late Charlie Munger, bought shares of American Express in the 1990s, and why it has remained in the portfolio ever since, making it one of the longest-held positions in Berkshire.
When Stephen Squeri took over as CEO of American Express in 2018, Buffett reminded him, “The most important thing about American Express is the brand and the customers who aspire to be associated with the brand.”
With a transaction volume of $1.1 trillion in the US by 2023, American Express is the third most used card brand, behind Visa and Mastercard. However, there is a clear difference between him and his two larger colleagues.
Visa and Mastercard operate as open-loop payment networks, while American Express operates a closed-loop system. In other words, Visa and Mastercard act as middlemen between the card-issuing banks and merchants. They earn fees for the transactions facilitated by their networks, which they share with the issuing banks.
American Express, on the other hand, processes transactions but also lends money directly to its credit card customers, allowing it to generate both interest income and processing fees. While this exposes American Express to credit risk if customers default, it also benefits from rising interest rates. From 2021 to 2023, American Express’ net interest income increased by $5.4 billion, or 69%.
That credit risk means investors should pay attention to how American consumers feel financially when assessing the prospects for American Express. In the third quarter, it had a net charge-off rate of 2.6% on its credit card member loans. While this metric has been gradually rising in recent years, a key reason is that credit conditions have normalized in the years since the pandemic.
Because of the credit risk this poses, American Express regularly trades at a discount to Visa and Mastercard, which investors should be aware of when evaluating stocks based on valuation. However, its premium customer base has allowed the company to weather tough economic times better than other financial institutions that hold significant credit card loans.
American Express has been a cornerstone of Berkshire Hathaway’s portfolio for 30 years, thanks to its strong brand and solid business model. The company is well positioned to grow in a growing economy with strong consumer spending, and also performs well in times of inflation, which come with higher interest rates.
While credit risk is a concern, its premium customer base can better weather economic storms, making American Express an excellent stock that investors can hold for the long term with confidence.
Consider the following before buying shares in American Express:
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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. Courtney Carlsen has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Bank of America and Berkshire Hathaway. The Motley Fool has a disclosure policy.
After Berkshire Hathaway sold 235 million shares of Bank of America in the third quarter, This Is Its New Second-Largest Holding was originally published by The Motley Fool
