International Finance: American Express Financial Analysis

American Express Financial Analysis
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American Express Financial Analysis
American Express is an American company operating in banking financial services. The company was founded on March 18, 1850. Being a banking financial services company, American Express serves as a model to other companies since it has a wide clientele base. Over the past decade, the company has been making steady profits due to the increased need for people to travel across the world. American Express, also known as Amex, has expanded its services by partnering with other companies such as Wells Fargo for affiliate programs. Through such programs, the company has expanded its market reach, thus becoming one of the most crucial companies in America. The company is crucial because it offers travel and credit card services to all travellers to ensure safety. Risk management by the company is done on international standards since it views and analyses risks in terms of achievements and the number of risks associated with the intended action. According to "American express company – Financials" (n.d.), Amex gained fame during World War I when the British government used it to deliver letters. Through such operations in line with high risk, providers increased aid activity.
Section A: Recent Developments
Development One: Covid19
Another significant development that has impacted the global operations of Amex was the COVID-19 pandemic. The disease outbreak was first announced in December 201, originating in Wuhan, China. The pandemic spread rapidly, and in March 2020, the World Health Organization (WHO) announced it as a pandemic. As the spread and severity of its impacts on human health increased, there were measures developed by the WHO and were implemented by various governments. Among the measure was lockdown and closure of businesses to limit physical interactions to curb and minimize the spread of the virus. As a way of reducing human interactions, various governments introduced total lockdowns. It meant that there would be no physical activity of people outside their homes, while the only ones allowed to work were the essential workers. The latter provided essential services such as food, medication, and emergency services.
During this period, Amex, like other companies, suffered financial losses due to a decrease in purchases and the use of the American Express cards in making purchases and traveling. Due to the lockdown, companies were not making enough profit; hence there were salary cuts and even loss of jobs among other people. Therefore, a sudden financial struggle sent the majority of people thinking about how they would survive. Hence, there was a cutting in costs, and people opted to spend on essential services only, such as purchasing medication and food. Since the majority of the people using Amex cards are involved in travel and international businesses, there was a reduced amount of transactions that cost the company huge losses. In early 2020, the company reported having experienced an income drop of 15%, which was a major blow since there were no signs of the pandemic ending soon. In that year, the company recorded a revenue of $9.4 billion, an 18% drop from $11.4 billion the previous year. Such financial drops affected the company's operations since there were limited chances of recovery due to existing Covid-19 suppression measures in most countries. Considering the credits offered to customers in the first quarter of 2020, there were recorded losses of $111 million.
However, the company was hopeful about recovery, considering increasing credit card usage among the non-traveling and entertainment holders. The majority of the cardholders who were not travellers and, in the entertainment, industry was using American Express cards to pay for services ad products. There was an expected increase in the basic card usage to compensate for the travel and entertainment usage. According to "American express company – Financials" (n.d.), the company opted to engage in customer support to ensure that their customers enjoyed the best services during the COVID-19 pandemic. Some of these services concluded reduced charges and even incentives to reward individuals who spend a certain amount of money paying with their Amex cars. This way, there would be increased awareness among potential customers, and there would be increased spending due to low charges. Investing more in advertisements would be strategic to ensure that more potential customers knew about American Express and its services since the majority were now working from home, a reason why there were high possibilities of seeing the advertisements.
Development Two: Russia-Ukraine Conflict
The company has been affected by the most recent development, which is the Russia-Ukraine conflict. The conflict began in 2014 but escalated at the beginning of 2022 when Putin had the Russian troops invade Ukraine. This action led to a response from the Ukraine government, thus escalating the matter. Following the deaths of people and displacement of many others, American Express decided to stand up for the affected communities and show solidarity by protecting the peace. As the most significant way of showing solidarity, the company joined other credit card and payment companies in boycotting Russian services due to the country's undying quest for more conflict escalation.
Being a multinational company, Amex has proved to be an ambassador of peace in the many years of its operations. Therefore, the escalation of the conflict between Russia and Ukraine led the company to take sides in support of humanity and act in line with the sanctions placed against Russia by the Western countries. Since the placement of sanctions, the company has halted its operations in the country while blocking all Russian banks from using its services as a sign of solidarity for Ukraine, which has fallen victim to brutal attacks by Russia.
Regarding the escalation of the development, there were significant impacts on the company's financial generation since the majority of people in the two countries should not access the services as was required. Due to the lack of peace, company sales in the region dropped, thus affecting the company's well-being. American Express sort of boycotted the services in the country as a way of persuading the president to give in to power demands and accept an attempt at dialogue that could promote peace. The international sanctions placed against Russia by Western countries led to the suspension and blockage of Russian banks from using credit card payments such as American Express. Therefore, there was an abrupt reduction in the company's financial status due to the abrupt cancellation of services in Ukraine.
Consequently, there have been no efforts to lift the sanctions since there has been no sign of improved relations between the two conflicting countries. Until the sanctions are over, it is most likely that there will be no attempts to mitigate the situation since the company could not go against the sanctions because the suspension of services is a sign of solidarity and support for humanity. The company has organized for its American employees in Russia to travel back and secure jobs in other company branches for their safety. Despite the huge losses incurred due to lack of service provision, the company will uphold the suspension of services unless otherwise advised or the lift of sanctions against Russia, which has become a common enemy for the Western countries due to its disruption of peace.
Section B: Dividend Policy and Sources of Finance
Dividend Policy
The dividend irrelevance theory applies to this company compared that its pay-outs do not have significance to the functionality and operations of the company. The levels of uncertainty experienced in the company were due to the developments experienced in sequence. Just after the development of COVID-19 before recovery, there was the second development which is the Russia-Ukraine conflicts, thus impacting profitability. The company has increased the dividends from 2018 through 2020 due to exemplary performance regardless of the struggles. Dividend pay-out by the company is a sign of its performance and hope in the market to show dedication for continued positive performance. According to Trivedi (2020), this share of dividends by the company each year is relevant to dividend signaling theory which suggests that a company shares its dividends to indicate future positive prospects. Therefore, Amex is most likely to have a continuous trend of positive dividend pay-out.
The dividend per share for the company is gotten by dividing the number of dividends paid out by the company by the number of shares outstanding. In 2018, the amount f shares outstanding was 856; in 2019, it was 828, and 805 in 2020. Therefore, there is a high likelihood that the company's dividend per share will increase through the three years, indicating a positive trend in profitability and performance in income generation. The dividends paid out in 2018 were 1,324, 1422 in 2019, and 1474 in 2020. The table below indicates a calculation to get the dividend per share for the company for three consecutive years.
Dividends Per Share Calculation
 

2020

2019

2018

Dividends paid out

1474

1422

1324

Shares outstanding

805

828

856

Dividend per share

1471/805=1.83

1422/828=1.72

1324/856=1.55

The dividends per share have been increasing throughout the three years, from 1.55 in 2018 to 1.72 in 2019 and 1.83 in 2020. This trend shows an increase in profitability for the investors, indicating the stability and health of the business.
Consolidated Statement of Cashflows
Cash Flows from Financing Activities
Net increase in customer deposits

2020
13,542

2019
3,330

2018
5,542

Net (decrease) increase in short-term borrowings

(4,627)

3,316

(148)

Proceeds from long-term debt

69

12,706

21,524

Payments of long-term debt

(15,593)

(13,850)

(18,895)

Issuance of American Express common shares

44

86

87

Repurchase of American Express common shares and other

(1,029)

(4,685)

(1,685)

Dividends paid

(1,474)

(1,422)

(1,324)

The above tabular distribution of financial data compares the company's financial performance for three consecutive years, beginning 2018 to 2020. 2020 marked the highest amount of customer deposits, increasing by more than 200% from 2018, signifying a profitable trend. The increase in customer deposits is a sign of increased brand recognition and loyalty, as well as a potential increase in revenue generation. However, the repurchase of a common share for the company decreased in 2020 compared to the other years, signifying a decrease in investment and expansion capital for the company. There was a stable trend in payment of long-term debts, signifying consistent management of debts, a significant factor that impacts the company's business and profitability.
Sources of Finance
According to "American express company – Financials" (n.d.), sources of finance are the services or activities in which an organization or business is involved that generate revenue to fund its operations. Sources of finance can be internal or external, depending on the nature of the business. Since Amex operates in the banking financial services, its activities that generate income are tied to financial transactions using its channels to make payments and other engagements. The company generates finances through two main streams, which are merchant revenue and cardholder revenue.
Merchant Revenue
American Express earns most of its revenue from merchant revenue, also known as discount revenue. The number of fees charged to merchants using the American Express card to pay for services and products. Trivedi (2020) implies that the company charges relatively high fees compared to its competitors, Mastercard Inc. and Visa Inc. The high fees are associated with the financial class of the merchants using the American Express card, who are wealthier Americans compared to others using other services. It is presumed that the company gained the majority of merchants because it never used to charge fees during transactions. Instead, merchants were expected to pay for the monthly bill in full, a failure to which the company would involve a collection agency to collect the money from the merchant and have their account closed. Therefore, this could be why the company managed to attract many merchants since the majority like settling their bills one time instead of continuous deductions as transactional fees and taxation during every transaction.
Cardholder Revenue
The company generates huge income from operations by cardholders who transact using the American Express cards. According to "American express company – Financials" (n.d.), the company generates high revenue from interest charged on credit card owners for late payment of their bills. Statistics indicate that around 69% of credit cardholders forget to settle their monthly credits in time, thus attracting hefty fees. Therefore, the interest accumulated on these defaulted bills benefits the...