How Warren Buffett’s Berkshire Hathaway came to own 20% of American Express

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

“You can’t make another American Express,” Buffett told Bloomberg in December. “I can start another shoe shop. I can start another commercial publication. I could do all kinds of things with hundreds of billions of dollars.

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

In 2022, Berkshire built a minimum stake of 20.2% in Occidental Petleum (OXY) and received regulatory approval to buy up to 50% of the oil giant’s common stock. 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 Good Housekeeping seal of approval,” American Express CEO Stephen Squeri recently told Yahoo Finance of the direction we’re heading enthusiastically. [is important].”

In 2020, when the pandemic hit, AmEx stock fell to $66 as lockdowns and travel bans cut earnings by 39%. But Buffett kept his stake in the company even as he sold airline and bank stocks.

AmEx was able to recover from the economic slowdown caused by COVID, reaching $196 per share in 2022, its highest price in decades.

That momentum carried over into 2023: AmEx’s most recent quarterly results showed a small shortfall for the fourth quarter, but the company said it is positive on its outlook for the rest of the year.

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 share of AmEx

While the AmEx brand has emerged from the pandemic in a position of strength, that was not always the case.

Buffett’s interest in AmEx began in the 1960s, during the first wave of consumer credit through banks. For American Express, it was not without controversy.

In 1963, Anthony De Angelis, founder of the 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 increase prices in the soybean oil market and increase the value of Allied.

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

“Every fiduciary department in the United States was in a panic,” Buffett said of the scandal. “I remember that Continental Bank owned more than 5% of the company and suddenly they not only saw that the escrow accounts were going to have zero share value, but they could be valued. The shares, of course, just passed and the market became a bit inefficient for a short period of time.”

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

The credit card boom of the 70s and 80s made AmEx a major player in the market. By the late 1990s, two-thirds of American households had a credit card. Buffett can now go all out and make his first big investment 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 American Express stock since the late 1990s, but its stake in AmEx has continued to grow due to stock buybacks.

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

And even though AmEx had a rough start to 2016 financially, Buffett stuck with his investment.

“We now own 20% of American Express,” Buffett said at Berkshire Hathaway’s annual meeting in 2022. “It happened to work very well. If they overpaid for the stock and all that — that doesn’t solve every problem — but it’s nice when you have an asset that you like and they take your ownership interests.”

The AmEx Pandemic Review

One of American Express’ greatest assets was its perception as a status symbol, which endured after a series of rebranding efforts.

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

AmEx also collects revenue from the data it collects on cardholder spending, which is used for targeted marketing and providing offers to customers. This, in turn, has helped AmEx attract the interest of Millennials and Gen Z consumers in recent years as the company has evolved from a traditional luxury credit card provider for a digital payments provider.

AmEx rebranded its Platinum card as a “lifestyle card” by increasing its in-house fees and perks, and entering e-commerce and food delivery services with higher rewards. Since the strategic changes came into effect, the company has doubled its number of Platinum cardholders, with Millennials and Gen Z customers accounting for around 60% of all growth -new consumer card holders.

And as pandemic restrictions have been lifted, AmEx has expanded its global reach with new travel benefits. They offered more rewards, points and a new Centurion Airport Luxury Lounge. According to Statista, the AmEx payment method is now accepted on most websites in over 178 countries.

“This whole concept of generational relevance is huge for us,” Squeri told Yahoo Finance. “We will continue to modify our products and add value to our products that will not only appeal to Millennials but also to Gen Xers and Boomers. Millennials and Gen Zers are our fastest growing segment.”

The AmEx CEO also emphasized that as AmEx’s largest shareholder, Buffett is “doing it right.”

“He understands that the AmEx brand is special,” he said. “He tells me that all the time. We both agree that the customer base is something special. Anyone with Warren as their largest shareholder would be pretty lucky.”

Tanya is a data reporter at Yahoo Finance. Follow her on Twitter. @talangaushal00.

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