American Express Caters to Affluent Spenders. Can That Cushion It If the Consumer Cracks?

There's a reason that American Express (NYSE: AXP) is one of Warren Buffett's favorite stocks. It's not only one of Berkshire Hathaway's longest-held stocks; it is also one of the conglomerate's largest positions.

American Express is not the largest credit card company or payment provider, but it occupies a unique position within the industry. First, American Express is a closed-loop provider, meaning it is a credit card issuer and lender with its own network. In addition to swipe fees, it also generates interest income on the loans.

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Also, American Express appeals to a more affluent customer base, charging higher fees but offering more rewards and incentives than other credit card companies. This helps it create a loyal customer base. In addition, because customers are generally wealthier, American Express tends to be less affected by challenging economic times than its main closed-loop rival, Discover, owned by Capital One.

In addition, the more affluent customer base is less prone to defaults or delinquencies, improving American Express's credit quality and reducing risk.

Is American Express stock a buy?

In the first quarter, consumer spending slowed and inflation rose, creating a sluggish economic environment. Yet, American Express showed its advantages as its fee revenue increased 11%, its net interest income rose 13%, and its overall net income increased 15% year over year.

Further, its net write-off rate, which tracks bad loans unlikely to be repaid, dropped to 2% in Q1, down from 2.1% in the previous quarter and 2.1% in Q1 2025. The 30-day delinquency rate also remained unchanged at 1.3%, while its provisions for credit losses were down from the previous quarter.

The average charge-off rate for banks in Q1 was 4.01%, according to the St. Louis Fed. For Discover, it was 5.05%. So, American Express had much better credit quality than the average bank and its closed-loop credit card rival, Discover.

American Express stock is down about 8% year to date, but it has been on the upswing lately, rising about 8% over the past month. Much of the earlier decline was driven by investor anxiety about the economy and rising inflation, which was somewhat alleviated by American Express's strong Q1 results, released in April.

American Express maintained its fiscal-year guidance, which some investors found disappointing given Q1's robust earnings beat. But with its solid credit quality and affluent client base, American Express stock has typically outperformed the market during downturns. For example, in 2022, it was down 9% compared to a 19% drop for the S&P 500 (SNPINDEX: ^GSPC).

American Express stock is also reasonably valued, trading at 19 times forward earnings. That makes it an even better long-term buy right now in this uncertain market, as its customer base would be less impacted by economic headwinds.

American Express is an advertising partner of Motley Fool Money. Dave Kovaleski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends American Express and Berkshire Hathaway. The Motley Fool recommends Capital One Financial. The Motley Fool has a disclosure policy.