American Express Co. (AXP) (AmEx) has announced the receipt of the much-awaited approval for its comprehensive capital plan (CCP) from the Federal Reserve that allows the company to deploy its excess cash in returning wealth to investors, primarily through share repurchases and dividend hikes. The company has filed a regulatory filing for the same.
While AmEx maintained its 18-cents quarterly dividend over the last couple of years, no shares have been repurchased in the last ten quarters. This was because share repurchases were suspended during the first quarter of 2008, in light of the challenging global economic environment and limitations under the CCP.
These limitations included AmEx becoming a bank holding company from a credit issuer company in November 2008, and thus required its capital plan to be reviewed by the Federal Reserve.
Since the inception of repurchase programs in December 1994, 670 million shares have been acquired under the cumulative board authorizations to repurchase up to 770 million shares. On a cumulative basis, since 1994, the company has distributed 64.0% of capital generated through share repurchases and dividends.
In January, this year, AmEx had submitted its CCP to the Federal Reserve requesting approval for additional share repurchases in 2011 and as expected, a positive response came in although management had not planned to repurchase any shares until the first quarter of 2011.
Additionally, management had previously indicated that share repurchases would only be made if it had excess cash after paying its dividends and exploring acquisition and other investment opportunities.
Exiting 2010, AmEx reiterated its long-term target of investing about 50% of excess capital into the growth of the business, while paying out the remaining 50% in the form of dividends and share repurchases.
While increased card spending and lesser defaults have been lowering the provision for losses, these factors are also helping a strong return on equity.
Further, given the company’s strong capital ratios (Tier 1 common risk-based capital of 11.1% at 4Q10, well above the current regulatory requirement of 7% under Basel 3), AmEx was not expected to incur any problem obtaining regulatory approval and we see a significant opportunity of returning capital to shareholders. Besides, the company is also sufficiently liquid to finance its $20 million in funding maturities due in 2011.
Meanwhile, the Federal Reserve has also given a positive response after reviewing the balance sheets of companies such as State Street Corp. (STT) and PNC Financial Services Group (PNC), who are now hiking dividends to retain investors’ confidence.
AMER EXPRESS CO (AXP): Free Stock Analysis Report
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STATE ST CORP (STT): Free Stock Analysis Report
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