AmEx Q1 Earnings Top, Expense Checked

American Express Co. (AXP), or AmEx, reported its first-quarter 2014 operating earnings per share of $1.33. The result outpaced both the Zacks Consensus Estimate of $1.30, and the year-ago quarter figure of $1.15 a share.

Consequently, net income from operations climbed 12% year over year to $1.43 billion from $1.28 billion in the year-ago period.

AmEx’ total billed business, or global card spending, continued to witness improvement in the U.S. and beyond climbing 6% year over year to $238.1 billion. The increase came from cards-in-force in the U.S. that increased 6% to $159.2 billion, whereas international cards-in-use also improved by 6%.

Behind the Headlines

AmEx posted total revenue, net of interest expenses, of $8.2 billion, up 4% year over year and 5% on constant currency basis. However, it lagged the Zacks Consensus Estimate of $8.41 billion. The year-over-year upside in revenues was supported by healthy growth in card spending, net interest income and the loan portfolio. Further, higher yields and strong credit indicators were partially offset by lower lending balances.

However, provisions for losses grew 17% to $485 million, driven primarily by lower net write-offs in the reported quarter and larger reserve release in the year-ago quarter.

Meanwhile, AmEx’s total expense dipped 1% year over year to $5.51 billion in the reported quarter, primarily reflecting decline in operating expenses, partially offset by higher card member services and rewards. Tax rate stood at 35% against 33% in the year-ago quarter.

Segment Results

U.S. Card Services reported net income of $876 million, up 9% from $804 million in the prior-year quarter. Total revenue, net of interest expenses, increased 5% to $4.3 billion.

International Card Services’ net income amounted to $159 million, decreasing 11% from $178 million in the year-ago quarter. However, total revenue, net of interest expenses, came in at $1.4 billion, up 3% year over year and 7% on constant currency basis, driven by higher cardmember spending and revenues from Loyalty Partner business.

Global Commercial Services’ net income dipped 4% year over year to $184 million. However, total revenue, net of interest expenses, improved 3% year over year and 4% on constant currency basis to $1.2 billion, reflecting higher spending by card members, partially offset by lower travel commissions.

Global Network & Merchant Services reported net income of $443 million, up 19% from $373 million in the prior-year quarter. Total revenue, net of interest expenses, stood at $1.4 billion, up 5% year over year and 7% on constant currency basis, driven by higher merchant-related revenues.

Corporate & Other reported net loss of $230 million, contracting from net loss of $266 million incurred a year ago.

Financial Update

As of Mar 31, 2014, AmEx’s total assets stood at $151 billion (down from $153 billion at 2013-end), while long-term debt totaled $54 billion (down from $55 billion at 2013-end) against cash of $21 billion (up from $19 billion at 2013-end). Meanwhile, shareholder equity amounted to $20 billion at the end of Mar 2014, up from $19 billion at 2013-end.

As of Mar 31, 2014, AmEx’ return on equity (:ROE) was 28.3%, up from 23.2% in the year-ago period. Return on average common equity (:ROCE) was 28.1%, increasing from 23.0% in Mar 2013. Further, return on average tangible common equity was 35.4%, up from 29.3% in the comparable period last year. Further, book value increased 7% year over year to $18.87 per share.

Capital Deployment Update

During the reported quarter, AmEx repurchased 10.5 million shares, at an average price of $88.97, for a total of about $934 million. This came slightly below the $1.0 billion mark estimated previously.

On Feb 10, 2014, AmEx paid a regular quarterly dividend of 23 cents per share to shareholders of record as on Jan 10, 2014.

Approximately 73% of capital generated was distributed to shareholders through dividend payouts and share repurchases during first-quarter 2014.

On Mar 26, 2014, AmEx announced the receipt of approval for its comprehensive capital plan from the Federal Reserve. Subsequently, the board plans to implement a 13% dividend hike (from 23 cents to 26 cents a share) beginning second-quarter 2014.This will mark the second dividend hike by the company since Nov 2007.

Additionally, AmEx aims to buy back shares worth about $4.4 billion in 2014, while another $1.0 billion of repurchases are projected in first-quarter 2015.

Guidance

In Jan 2014, management disclosed its goal of keeping operating expense growth under 3% in 2014.

Peer Take

AmEx’s peer, Discover Financial Services (DFS) is expected to release its first-quarter results after the closing bell on Apr 22. Another rival, Visa Inc. (V) will likely release its results for the second quarter of fiscal 2014 after the closing bell on Apr 24.

On May 1, MasterCard Inc. (MA) is slated to release its first-quarter results before the opening bell. While Visa sports a Zacks Rank #2 (Buy), AmEx, MasterCard and Discover Financial carry a Zacks Rank #3 (Hold).

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