American Express (AXP) Gets a Charge Out of “Divi-X”

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AXP 051416 64.12 Yld 1.81 PE 12.82

Returns Since June 2009

AXP - 285.65%     AXP with "Divi-X" - 320.34%

There has been a lot of speculation about the long-term prospects of American Express since it lost its alliance with COSTCO Wholesale Corporation and you can tell from the recent share activity since the announcement was made, there is not an abundance of optimism right now.  Additionally, American Express just announced its quarterly dividend which did not include an increase.  This is the first quarter since April 2012 that there wasn't an annual increase in its dividend.

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American Express has not been shy about holding back dividend increases in the past.  Up until April 2012, American Express held its dividend at $.18/qtr. for seventeen straight months going as far back as October 2007.

American Express and "Divi-X" Since 2009

American Express is one of the components that make up our "Divi-X" Index.  Had you invested $10,000.00 in American Express in 2009 using the "Divi-X" System, the following is what your 'Leverage Projection Worksheet' would have looked like based on "Divi-X" guidelines:

AXP 061909 24.64 Yld 2.92 PE NA 10YR Lev Proj

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In 2009, American Express had a dividend that was over a full percentage point higher than its current 1.81%.  That 2.92% dividend yield allowed us to leverage 19.48% of our purchase which added an extra 98.19 shares to our position, giving us a total of 504.0322 shares.

 

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Returns

In my book, I remark that a small dividend should not discourage you from taking a position in a security using the "Divi-X" System.  As you can see from the following chart, it has treated us rather well.

AXP 061909 24.64 Yld 2.92 PE NA 10YR Ret Scen

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A few things to note about this chart:

  1. American Express's impressive performance allowed "Divi-X" to double your money in less than two short years after purchase.  'Without "Divi-X" crossed that threshold a few short months later.
  2. At its highest level in Dec. 2014, our small 2.92% yield gave us an astounding 64.23% advantage over an all cash investment.
  3. As of close on May 13, 2016, "Divi-X" continues to hold a 34.68% lead over an all cash investment.
  4. Most impressively, is how well "Divi-X" held up against an all cash investment when American Express's share price cratered from its high in Dec. 2014 to settle at its most recent low in Jan. 2016.  Normally, when using leverage, sharp declines in share price leave an investor exposed to negative gains, but with the prudent use of leverage using the "Divi-X" System, over the long-term, that risk is greatly reduced, as it was in this case, which allowed "Divi-X" to enjoy a 24.05% cushion despite American Express's sharp decline.

Dividend Yields

AXP 061909 24.64 Yld 2.92 PE NA 10YR 20YR Yld

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A few things about this chart:

  1. As mentioned in the beginning of the article, American Express is not increasing its dividend this year, at least not in this quarter; despite that, the "Divi-X" yield will surpass the 'All Cash' investment yield next year.
  2. You can see that in every year after, assuming there were no more dividend increases, "Divi-X" would continue to widen its yield spread over an 'All Cash' yield.
  3. If American Express does increase its dividend in the future, the "Divi-X" yield spread would widen considerably further.
  4. Because of the inconsistent dividend payment history of American Express, our projected yields cannot be relied upon.

Running Leverage Rate

Thanks to our dividend, "Divi-X" purchased us an additional 98.19 shares which leveraged us at a conservative 19.48%.  Since we took our position, here's how our leverage position looks today:

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Our original leverage position totaled $2,419.35 which represented 19.48% of our total purchase price of $12,419.35.  Since then, our loan balance has declined 39.9% ($1,454.21 / $2,419.35) but because of share price appreciation, our levered position currently accounts for only 4.45% of total shareholder value!  Can you believe it?  We now owe less than five percent of total share value.  That's awesome!

Initiating a New Position

We're going to take a new position in American Express and because the dividend yield today is a bit lower today than our original position, we're going to up our "Multiplier Pick" to 100.  We could go higher and still be on the conservative side, but I'm going with 100.  This is what our new 'Leverage Projection Worksheet' looks like:

AXP 051316 64.12 Yld 1.81 PE 12.82 Lev Proj

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Things look a lot different today than they did back in June 2009.  Even with our increased "Multiplier Pick," we were only able to leverage 27.68 shares for a total amount of $1,775.15.  Again, do not let a small yield deter you from making the investment if you believe in your pick.

Based on our conservative criteria, these are the five year milestones we hope to achieve, or better:

AXP 051316 64.12 Yld 1.81 PE 12.82 5YR Proj

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And lastly, here is our dividend picture.  Because we know of the inconsistency in the dividend payout, we won't put too much faith into the projected dividends.

AXP 051316 64.12 Yld 1.81 PE 12.82 20Yr

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Now, assuming there will never be another dividend increase, it would be a very, very long time before "Divi-X" would catch up to the 'All Cash' yield.  However, in the event of regular dividend increases, no matter how small, "Divi-X" would close the yield gap rather quickly.

Conclusion

Don't let our modest projection fool you.  The returns looked similar when we ran our 'Leverage Projection' back in June 2009.  We're going to put this one on the shelf, come back next year and see how we're doing.  Till next time, many happy returns.


Authored by Lee Carroll Wentker

All screen captures are taken from 'The "Divi-X" System Workbook'

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The security showcased here is for learning purposes only. It is not a recommendation or an endorsement of any kind. Do your own due diligence before making any investment.

All work is copyrighted by The Dividend Times, LLC 2015 - 2016

 

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