Buffett’s Startling Lack of Diversification (Part Five): How He Bought American Express on the Cheap

Warren Buffett has owned American Express (AXP) as part of Berkshire Hathaway’s (BRK.B) investment portfolio since 1994. The current 151.6 million-share stake has a market value of $8.5 billion, making it the 4th largest component of Berkshire Hathaway’s Big Four. Coca-Cola (KO), Wells-Fargo (WFC) and International Business Machines (IBM) are Buffett’s three largest, and the top four comprise a stunning 70% of his Buffett’s $75 billion portfolio.

But American Express is actually a return engagement; Buffett bought a big stake of the company in the 1960s for his partnership, after the stock had been hammered with a 50% loss following the 1964 salad oil scandal. (Google “AXP Salad Oil Scandal” for details.) He eventually sold at a huge profit.

The mid-1990s investment in American Express came on the heels of a less dramatic crisis: a failed decade of trying to expand into a more diversified financial service behemoth had created a lost decade for Amex shareholders.

AXP Chart

AXP data by YCharts

With new management in place and a re-doubled focus on its core credit card business, Buffett smelled a global brand on sale. Since his initial purchase in 1994, Buffett’s Amex stake has more than lapped the field, as seen in a stock chart.

AXP Total Return Price Chart

AXP Total Return Price data by YCharts

But Buffett has let the position slide in terms of its impact on his overall portfolio. In 2006, Berkshire Hathaway’s American Express stake accounted for 17% of its total investment portfolio. Today it’s down to 10%. During the financial crisis, Amex’s cratering stock price -- it lost more than 70% -- sunk its share of Berkshire’s overall portfolio to about 5%. Buffett didn’t sell then, but nor did he buy more coming out of the crisis, as he has done by the bucket-load with Wells Fargo. But to be fair, Berkshire’s 13% ownership stake in Amex makes Buffett its largest shareholder.

With a cost-basis of less than $1.3 billion and a market value pushing $8.5 billion, taxes might be a consideration for Buffett. But he wouldn’t keep holding if AmEx wasn’t delivering (see: Johnson & Johnson (JNJ)).

AXP Free Cash Flow TTM Chart

AXP Free Cash Flow TTM data by YCharts

American Express has also managed to double its dividend payout over the past decade. Even during the financial crisis free-fall in its stock price, Amex didn’t touch its dividend from 2008 through last year. This year the payout was raised 11%.

Carla Fried, a contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine.

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