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

American Express (AXP), one of the world’s leading 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 start another business publication. I could do all kinds of things with hundreds of billions of dollars. But I can’t put in 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 Berkshire’s largest holding of securities by weight and third largest by market capitalization, with its stake valued at $24.8 billion – which had grown to $26.1 billion as of September 29, 2022. .

In 2022, Berkshire acquired at least a 20.2% stake in Occidental Petrleum (OXY) and won regulatory approval to buy 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 like a Good Housekeeping seal of approval,” Stephen Squeri, CEO of American Express, told Yahoo Finance recently. “Warren and Berkshire are iconic investors, and having it speak to the brand and the company, and speak to the direction we’re going so excitedly [is important].”

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

AmEx was able to rebound after enduring the COVID-induced economic downturn and hit its highest price in decades at $196 per share in 2022.

That momentum continued into 2023: AmEx’s latest quarterly results showed a slight miss for its fourth quarter, but the company said it remained positive about 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)

How Buffett acquired its stake in AmEx

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

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

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

Eventually, a whistleblower came forward claiming that Allied was tricking AmEx into getting more loans by filling oil tanks with water. This turned out to be true and De Angelis filed for bankruptcy and went to jail for seven years. The irregularity became known as the “salad oil scandal” and sparked concern on Wall Street as AmEx now had to pay Allied’s bill.

“Every trust department in the United States panicked,” Buffett said of the scandal. “I remember Continental Bank had over 5% of the business and all of a sudden not only did they see that the trust accounts were going to have shares worth zero, but it could be valued. The shares poured out , of course, and the market became slightly inefficient for a short time.”

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

The credit card boom of the 70s and 80s made AmEx a major player in the market. By the end of the 1990s, two-thirds of American households had a credit card. Buffett could now pull out all the stops and take 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 hasn’t bought any shares of American Express since the late 1990s, but its stake in AmEx has continued to grow following stock buybacks.

Between 1998 and 2005, Berkshire’s stake fell from 11.2% to 12%. In 2020, AXP became Berkshire’s largest percentage stake.

And even though AmEx had a rocky start to 2016 financially, Buffett maintained his investment.

“Now we own 20% of American Express,” Buffett said at Berkshire Hathaway’s 2022 annual meeting of shareholders. If they overpaid for the stock and all that – that doesn’t solve all the problems – but it’s a wonderful thing if you have an asset that you like and they take your stake.

AmEx’s Pandemic Overhaul

One of American Express’ greatest strengths has been its perception as a status symbol, which has endured after undergoing a series of rebranding efforts.

The company has a simple revenue model: most of its revenue is generated by interest from balances and fees. 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 down the line.

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

AmEx rebranded its Platinum card as a “lifestyle card” by increasing its in-home fees and benefits and dipping into e-commerce and food delivery services by boosting rewards. Since the policy changes took effect, the company has doubled its number of Platinum cardholders, with millennials and Gen Z customers accounting for approximately 60% of the growth in all new mainstream cardholders.

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 luxury lounge at Centurion Airport. AmEx’s payment method is now accepted on most websites in more than 178 countries, according to Statista.

“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 not only speak to millennials, but speak to Gen X and baby boomers. Millennials and Gen Z are the fastest growing segment. faster than we have.”

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

“He understands that the AmEx brand is special,” he said. “He tells me that all the time. We both agree that the clientele is special. Anyone who has Warren as a major shareholder would be pretty happy.”


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

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