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.
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.
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)).
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.