Better Buy: American Express Company vs. PayPal

By Markets Fool.com


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Moving beyond the need for cash is a major step in every economic system, and the financial industry has made it its mission to try to bring innovation to how we pay for things. American Express was one of the pioneers in the payments industry with its charge-card products, and for decades, millions of cardmembers never left home without their AmEx cards. More recently, though, PayPal has grown from its humble beginnings as a payment vehicle for online auction transactions to become a major force in the electronic and mobile payments business. Many interested investors want to know which stock is a better buy right now. Let's compare American Express and PayPal on a number of metrics to see which is more worthy of your consideration.

Valuation
Recent performance has taken these two stocks in opposite directions. American Express has lost a quarter of its value in the past 12 months. PayPal, on the other hand, is up 11% from its closing price on its first day of when-issued trading preceding its IPO.

The relative valuations for these two stocks reflect their disparate performance lately. On a trailing basis, American Express trades at just 12 times earnings, compared to more than 40 times trailing earnings for PayPal. As we'll discuss in more detail below, growth estimates for PayPal are higher, and so PayPal's forward earnings multiple is a much more palatable 23. Nevertheless, that's more than double the forward multiple of 11 that AmEx currently has. Based solely on valuation, American Express shares appear to have a greater margin of safety built into their price than PayPal stock.

Dividends
Dividends are another area where it's easy to see the distinction between PayPal and American Express. PayPal doesn't pay a dividend, reflecting its short history as an independent entity and its desire to plow any available cash into further growth efforts. American Express pays a dividend of nearly 2%, and even though that's less than the average throughout the stock market, it's among the highest in the credit card and electronic-payments industry.

American Express has also done a good job of growing its payout over time. The company has tended to keep its dividend steady during challenging financial conditions, such as the four-year period beginning with the Recession of 2008 and the tech bust period from mid-2000 to early 2003. Even so, the fact that American Express has increased its dividend by almost 150% in the past decade is a testament to its dedication to treating shareholders well. American Express gets the nod for better stock on the dividend front.

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Growth
At this point, it might seem like American Express will run away with the contest. But on the growth front, PayPal's potential is much clearer.

American Express has struggled recently, undergoing a contraction in its business stemming from the loss of business from key partnerships like its former exclusive arrangement with Costco Wholesale. Now, investors expect slight reductions in revenue both this year and next, and while earnings might not drop, the consensus forecast is for gains of just 2% or so over the next two years. Longer-term growth projections in the 8% range are more upbeat, but they are still relatively slow.

By contrast, PayPal has huge expectations for future growth, and investors have pinned a forecast of 19% annual growth over the next five years. In its fourth-quarter report in January, the company reported full-year GAAP earnings that nearly tripled from 2014 levels. Just in the fourth quarter alone, PayPal processed 1.4 billion payment transactions, overcoming foreign-currency weakness to produce total payment volume gains of 23% and a 27% rise in adjusted net income. PayPal is hoping to produce 45% to 50% gains in adjusted earnings per share in 2016, and if the ongoing trend toward more customers and greater usage among those customers continues, then PayPal's near-term growth could accelerate.

American Express has a long history of solid performance, and it's reasonable for investors to think that its recent woes are just another bump in the credit card pioneer's long history of success. For those willing to pay up for much stronger growth prospects, however, PayPal stock might well be worth the higher price you'll pay to buy shares.

The article Better Buy: American Express Company vs. PayPal originally appeared on Fool.com.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Costco Wholesale and PayPal Holdings. The Motley Fool recommends American Express. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.