Home Uncategorized How Warren Buffett’s Berkshire Hathaway came to own 20 of American Express

How Warren Buffett’s Berkshire Hathaway came to own 20 of American Express

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American Express (AXP), one of the world’s top credit card companies, has also long been a favorite of Berkshire Hathaway (BRK-ABRK-B) CEO Warren Buffett.

“You can’t create another American Express,” Buffett told Bloomberg in December. “I could create another shoe store. I could create another business publication. I could do all kinds of things with hundreds of billions of dollars. But I can’t put in the minds of people what is in their minds about American Express.”

As of September 29, 2022, Berkshire held 151,610,700 AmEx shares, or 20.29{bb67dc8068aeb19f357bd521b023405218769edfdf2fbe8fd5046748dc5a5bcb} of the total. At the end of 2021, AmEx was Berkshire’s largest securities holding by weight and third-largest holding by market cap, with its stake valued at $24.8 billion — which grew to $26.1 billion by September 29, 2022.

In 2022, Berkshire built a stake of at least 20.2{bb67dc8068aeb19f357bd521b023405218769edfdf2fbe8fd5046748dc5a5bcb} of Occidental Petrleum (OXY) and obtained regulatory approval to buy up to 50{bb67dc8068aeb19f357bd521b023405218769edfdf2fbe8fd5046748dc5a5bcb} of the oil giant’s common stock. So while AmEx may no longer be Berkshire’s largest holding by weight, the company’s value to Berkshire is clear.

“It’s sort of like a Good Housekeeping seal of approval,” American Express CEO Stephen Squeri told Yahoo Finance recently. “Warren and Berkshire are iconic investors, and to have him speak about the brand and speak about the company, and to speak about the direction that we’re going so enthusiastically [is important].”

In 2020, when the pandemic hit, AmEx stock declined to as low as $66 as lockdowns and travel bans dragged down profits by 39{bb67dc8068aeb19f357bd521b023405218769edfdf2fbe8fd5046748dc5a5bcb}. But Buffett retained his stake in the company, even as he sold airline and bank stocks.

AmEx was able to rebound after enduring the COVID-induced economic downturn and reached its highest price in decades at $196 a share in 2022.

That momentum has carried over into 2023: AmEx’s latest quarterly results showed a slight miss for its fourth quarter, but the company indicated it remains positive on its outlook for the remainder of the year.

NEW YORK, NY - SEPTEMBER 19:  Warren Buffett attends the Forbes Media Centennial Celebration at Pier 60 on September 19, 2017 in New York City.  (Photo by Taylor Hill/FilmMagic)
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 his stake in AmEx

Although AmEx’s brand emerged from the pandemic in a position of strength, that hasn’t always been the case.

Buffett’s interest in AmEx began in the 1960s, during the first wave of consumer credit via banks. For American Express, it wasn’t without a bit of 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 increase the value of Allied.

Eventually, a whistleblower came forward claiming that Allied was misleading AmEx to get more loans by filling up oil tanks with water. This was proven to be true and De Angelis filed for bankruptcy and went to prison for seven years. The impropriety became known as the “salad-oil scandal” and mounted concerns on Wall Street as AmEx now had to pay Allied’s bill.

“Every trust department in the United States panicked,” Buffett said about the scandal. “I remember the Continental Bank held over 5{bb67dc8068aeb19f357bd521b023405218769edfdf2fbe8fd5046748dc5a5bcb} of the company and all of a sudden not only do they see that the trust accounts were going to have stock worth zero, but it could get assessed. The stock just poured out, of course, and the market got slightly inefficient for a short period of time.”

Buffett used the opportunity to acquire 5{bb67dc8068aeb19f357bd521b023405218769edfdf2fbe8fd5046748dc5a5bcb} of AmEx for roughly $20 million.

The credit card boom of the ’70s and ’80s made AmEx a top player in the market. By the late ’90s, two-thirds of American households had a credit card. Buffett could now go all out and make his first large stake in the company in 1991 with $300 million.

Within seven years, Buffett owned more than 50 million shares of the company. Berkshire Hathaway hasn’t purchased any American Express stock since the late 1990s, but its stake in AmEx has continued to increase as a result of stock buybacks.

Between 1998 and 2005, Berkshire’s stake climbed from 11.2{bb67dc8068aeb19f357bd521b023405218769edfdf2fbe8fd5046748dc5a5bcb} to 12{bb67dc8068aeb19f357bd521b023405218769edfdf2fbe8fd5046748dc5a5bcb}. In 2020, AXP became Berkshire’s largest holding by percentage.

And even though AmEx had a rough start to 2016 financially, Buffett stood by his investment.

“Now we own 20{bb67dc8068aeb19f357bd521b023405218769edfdf2fbe8fd5046748dc5a5bcb} of American Express,” Buffett said at the 2022 Annual Berkshire Hathaway Shareholders Meeting. “That happens to have worked out extremely well. If they overpaid for the stock and all that — it doesn’t solve every problem — but it’s a wonderful thing if you’ve got an asset you like and they take your ownership interest up.”

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