How Warren Buffett’s Berkshire Hathaway Became a 20% Owner of American Express

American Express (AXP), one of the world’s largest credit card companies, has also 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 create another business publication. I could do anything with hundreds of billions of dollars. But I can’t put into people’s minds what they think of 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 the largest holding of Berkshire securities by weight and the third largest holding by market cap, with a $24.8 billion stake that rose to $26.1 billion by September 29, 2022.

In 2022, Berkshire acquired at least 20.2% of Occidental Petrleum (OXY) and received regulatory approval to purchase 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 Good Housekeeping seal of approval,” American Express CEO Stephen Squarey recently told Yahoo Finance. the direction in which we go with such enthusiasm [is important].”

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

AmEx has been able to bounce back from the economic downturn caused by COVID and hit its highest price in decades at $196 per share in 2022.

That momentum has continued into 2023, with AmEx’s latest quarterly results showing a slight deviation in the fourth quarter, but the company indicated it remains positive about its outlook for the rest of the year.

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

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

Like Buffett acquired his share in Amex

While the AmEx brand has come out of the pandemic strong, this has not always been the case.

Buffett’s interest in AmEx began in the 1960s, during the first wave of consumer credit through banks. For American Express, this has not been 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 drive up prices in the soybean oil market and increase Allied’s value.

Eventually, a whistleblower came forward claiming that Allied was misleading AmEx to get more loans by filling oil tanks with water. This proved to be true, and De Angelis declared bankruptcy and went to prison for seven years. The breach became known as the “salad butter scandal” and caused concern on Wall Street as AmEx now had to pay Allied’s bill.

“Every trust in the United States panicked,” Buffett said of the scandal. “I remember that Continental Bank owned over 5% of the company and all of a sudden they not only saw that there would be zero value shares in the trust accounts, but they could be valued. The stock, of course, just leaked out and the market got a little inefficient for a short period of time.”

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

The credit card boom of the 70s and 80s made AmEx a leading player in the market. By the end of the 90s, two-thirds of American households had a credit card. Now Buffett could go all out and make his first major stake in the company in 1991 with $300 million.

Within 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 grow as a result of share buybacks.

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

And while AmEx had a rocky start to 2016 financially, Buffett stood by his investment.

“Now we own 20% of American Express,” Buffett said at Berkshire Hathaway’s 2022 annual shareholder meeting. “It turns out it worked really well. If they overpaid for the stock and all, it won’t solve all the problems, but it’s great if you have an asset that you like and they increase your ownership.”

AmEx Pandemic Reconstruction

One of the greatest strengths of American Express was its perception as a status symbol, which has endured through a series of rebranding efforts.

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

AmEx also generates revenue from cardholder spending data, which is used for targeted marketing and offerings 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 a traditional luxury credit card provider to a digital payment provider.

AmEx has rebranded its Platinum card as a “lifestyle card” with increased commissions and benefits at home, and expanded e-commerce and food delivery services with increased rewards. Since the strategic change went into effect, the company has doubled the number of Platinum cardholders, with Millennials and Gen Z customers accounting for roughly 60% of all new consumer card growth.

And as pandemic-related restrictions have been lifted, AmEx has expanded its global reach with new travel benefits. They offered more rewards, points, and a new luxury lounge at Centurion Airport. 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 to us,” Skveri told Yahoo Finance. “We will continue to innovate our products and add value to our products that not only appeal to Millennials, but also appeal to Generation X and Boomers. Millennials and Gen Z is the fastest growing segment we have.”

AmEx’s CEO also stressed that Buffett “gets it right” as AmEx’s largest shareholder.

“He understands that the AmEx brand is special,” he said. “He talks to me about it all the time. We both agree that the customer base is special. Anyone with Warren as the largest shareholder would be very happy.”

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

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