American Express (NYSE:AXP) is another representative holding in the Portfolio. This global financial services firm combines a strong, upscale charge card brand with ownership of the underlying payment network to create a unique business model. The company attracts some of the most desirable cardholders whose affluence leads to average spending about three times as great as ordinary bank cards. American Express reinforces this higher charge card spending with a market-leading cardholder rewards program, creating a virtuous circle of higher spending and higher rewards. The company earns much of its revenue from the transaction or interchange fees it charges merchants that accept its card. Because its payment network is wholly owned, American Express avoids sharing this important revenue source, generating significantly better economics than the payment networks of its competitors whose interchange fees are shared with banks. Recently, American Express announced it will not renew its exclusive arrangement as the only credit card accepted at U.S. Costco stores. While this move will slow the company’s earnings growth over the short term, we admire the strong capital allocation discipline of the American Express management team in walking away from an arrangement offering inadequate shareholder returns. We expect American Express will take steps to overcome this loss of business and once again deliver double-digit earnings growth for shareholders in the years ahead.
From the Davis Financial Fund semi-annual review 2015.
