As Americans Swipe Their Cards, This Company Is Winning Big

Consumer spending is set to roar back...

In April, the University of Michigan's Consumer Sentiment Index rose to 86.5 – the highest level in more than a year.

April's rise follows a strong 84.9 March reading, where the index saw the largest monthly increase since May 2013. Like last month, the rapid pace of vaccinations and recent government stimulus boosted sentiment, according to Richard Curtin, the chief economist of the Survey of Consumers.

Over the past few weeks, we've highlighted some companies that are set to benefit as the economic reopening accelerates. That includes entertainment giant Disney (DIS) and spice-maker McCormick (MKC).

These companies had parts of their businesses that thrived over the past year, while the other segments lagged. But now, those underperforming segments are the ones that are going to lead the way as the economy reopens.

We're following this same theme today with credit-card titan American Express (AXP).

More than 110 million American Express cards are in use around the world, with cardholders racking up more than $1 trillion in charges every single year. The company also collects nearly $3 billion per year in annual dues from its customers simply for the right to carry an "AmEx" card.

Unlike other credit-card companies, American Express caters to higher-income clients. These are customers who are the most likely to pay back their debts.

What's more, American Express operates as a "closed-loop network." This gives it a triple-barreled source of revenue...

Operating a closed loop allows American Express to enjoy a valuable triple-barreled revenue stream.

Like other credit-card companies, it charges a processing fee to merchants who accept American Express cards. Like the banks that issue most credit cards, it collects interest on late payments. And as we mentioned, it has the power to charge a fee to cardholders.

However, the pandemic hit American Express hard. People pulled back on discretionary spending – especially on travel and entertainment, which are big moneymakers for American Express. So the company wasn't collecting nearly as many fees on card spending.

This trend has reversed in recent months – especially among online transactions. The recovery was evident in American Express' latest earnings report...

It reported earnings per share ("EPS") of $2.74, blowing past Wall Street's $1.61 estimate. Revenue for the quarter was $9.06 billion, only slightly below the market's $9.21 billion expectation.

Here's what happened... At the start of the pandemic, financial companies – including American Express – set aside billions of dollars of their earnings as reserves for loans that wouldn't be repaid.

But now, with the economy rebounding, these companies feel comfortable releasing some of these reserves back onto their balance sheet in the form of earnings.

In American Express' case, it built up these reserves to around $2.6 billion, nearly triple their pre-pandemic level. This quarter, the company released $675 million of those reserves back into earnings, boosting EPS.

While American Express nearly tripled the money set aside for bad loans, other big financial companies had to set aside even more cash. And American Express has its customer base to thank for that...

As we noted, American Express caters to a more affluent customer base, and these customers are less likely to miss their loan payments.

This is what makes American Express one of the best financial companies to own during a downturn. It doesn't have much exposure to risky borrowers.

The company is also seeing spending return...

American Express saw its customers spend 20% more on goods and services in March 2021 than March 2020, pushing the whole first quarter up 6% year over year. And it's 11% higher than this time in 2019.

AmEx cardholders have also dialed up their travel and entertainment (T&E) spending. With restrictions and lockdowns, there were few folks flying, going on vacation, or eating at restaurants. That all started to change last month...

American Express said March T&E spending was up 24% from the same month in 2020. This likely was due to the rapid pace of COVID-19 vaccinations, which accelerates the path back to "normal" life.

Overall T&E spending still remains down 50% from pre-pandemic levels. But it has recovered sharply off its lows – when it was down more than 80%. And this part of AXP's business should continue to recover as we get back to normal economic activity.

As economies reopen, consumer spending and travel is set to come roaring back. And that should benefit American Express.

Sometimes investing is simple.