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

American Express (AXP), one of the world’s top credit card companies, has also been a longtime 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 could start another shoe store. I could make another business publication. I could do anything with hundreds of billions of dollars. But I can’t put into people’s minds what’s in their minds about American Express.”

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 securities holding by weight and third-largest holding by market capitalization, holding $24.8 billion—which grew to $26.1 billion on September 29, 2022.

In 2022, Berkshire built at least a 20.2% stake in 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 greatest interest by weight, the company’s value to Berkshire is clear.

“It’s like a seal of approval from Good Housekeeping,” Stephen Squeri, CEO of American Express, recently told Yahoo Finance. direction we are so excited to go [is important].”

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

AmEx was able to recover from the COVID-induced economic downturn, hitting its highest price in decades at $196 per share in 2022.

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

While AmEx’s brand has emerged from the pandemic in a strong position, that hasn’t 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, it was not without some 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 prices in the soybean oil market and boost Allied’s value.

Eventually, a whistleblower came forward claiming that Allied tricked 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 prison for seven years. The impropriety became known as the “lettuce oil scandal” and caused concern on Wall Street as AmEx now had to foot Allied’s bill.

“Every trust department in the United States panicked,” Buffett said of the scandal. “I remember when the Continental Bank owned more than 5% of the company and all of a sudden they saw not only that the trust accounts would be worth zero shares, but that it could be assessed. The shares just poured out, of course, and the market became somewhat inefficient for a short period of time.”

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

The credit card boom of the 1970s and 1980s made AmEx a top player in the market. In the late 1990s, two-thirds of American households owned a credit card. Buffett was now able to 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 has not purchased American Express stock since the late 1990s, but its stake in AmEx has continued to grow as a result of stock buybacks.

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

And while AmEx had a rocky start to 2016 financially, Buffett held back on its investment.

“Now we own 20% of American Express,” Buffett said at Berkshire Hathaway’s 2022 annual shareholders’ meeting. “That just happened to work out really well. If they overpaid for the stock and stuff – it doesn’t solve every problem – but it’s great if you have an asset you like and they take your ownership interest.

AmEx’s pandemic revamp

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

The company has a simple revenue model: most of the income is generated from interest from balances and fees cardholders and merchants. Merchants pay more than AmEx competitors such as Visa (V) or Mastercard (MA) because AmEx cardholders tend to be wealthier and spend more, which later benefits merchants.

AmEx also collects revenue from the data it collects on cardholder spending, which it uses to target marketing and make offers to customers. That, in turn, has helped AmEx pique the interest of millennial and Gen Z consumers in recent years as the company has evolved from a traditional premium credit card provider to a digital payment provider.

AmEx has rebranded its Platinum card as a “lifestyle card” by increasing its fees and home benefits as well as increasing rewards in e-commerce and food delivery services. Since the strategic changes took effect, the company doubled its Platinum cardholder base, with Millennials and Gen Z customers accounting for approximately 60% of all new consumer cardholders.

And as the pandemic restrictions lifted, AmEx expanded its global reach with new travel benefits. They offered more rewards, points and a new luxury Centurion airport lounge. According to Statista, AmEx payment method is now accepted on most websites in more than 178 countries.

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

The AmEx CEO also stressed that Buffett is “doing well” 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 customer base is special. Anyone who has Warren as their largest shareholder would be quite happy.”

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

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