American Express 2005 Annual Report Download - page 36

returned to shareholders through dividends and the
share repurchase program. The maintenance of a solid
equity capital base provides the Company with a strong
and stable debt rating and uninterrupted access to
diversified sources of financing to fund growth in its
assets, such as cardmember receivables and loans and
other items. The Company maintains flexibility in its
equity capital planning and has developed a contin-
gency funding plan described below to help ensure
that it has adequate sources of financing in difficult
economic or market environments.
The Company believes allocating capital to its growing
businesses with a return on risk-adjusted equity in
excess of their cost of capital will continue to build
shareholder value. The Company’s philosophy is to
retain earnings sufficient to enable it to meet its growth
objectives and, to the extent capital exceeds investment
opportunities, return excess capital to shareholders.
Assuming the Company achieves its financial objectives
of 12 to 15 percent EPS growth, 28 to 30 percent return
on shareholders’ equity and at least 8 percent revenue
growth, on average and over time, it will seek to return
to shareholders an average of 65 percent of capital gen-
erated, subject to business mix, acquisitions and rating
agency requirements. During 2005, through dividends
and share repurchases, excluding the dividend from the
Ameriprise spin-off, the Company returned approxi-
mately 48 percent of total capital generated to its share-
holders. The Company paid $597 million in dividends
and continued share repurchases as discussed below.
Since the inception of the Company’s current share
repurchase program in 1994, approximately 65 percent
of capital generated has been returned to shareholders.
The Company maintains sufficient equity capital to sup-
port its businesses. Flexibility is maintained to shift
capital among business units as appropriate. For
example, the Company may infuse additional capital
into subsidiaries to maintain capital at targeted levels,
which include consideration of debt ratings and regu-
latory requirements. These infused amounts can affect
both American Express Parent Company (Parent Com-
pany) capital and liquidity levels. The Company
maintains discretion to manage these effects, including
the issuance of public debt or the reduction of projected
common share buybacks. Additionally, the Company
may transfer short-term funds within the Company to
meet liquidity needs, subject to and in compliance with
various contractual and regulatory constraints.
Share Repurchases
The Company has in place a share repurchase program
to return equity capital in excess of its business needs
to shareholders. These share repurchases both offset the
issuance of new shares as part of employee compensa-
tion plans and reduce shares outstanding. The Company
repurchases its common shares primarily by open mar-
ket purchases. Common shares may also be purchased
from the Company-sponsored Incentive Savings Pro-
gram (ISP) to facilitate the ISP’s required disposal of
shares when employee-directed activity results in an
excess common share position. Such purchases are
made at market price without commissions or other
fees. During 2005, the Company purchased 34.6 million
common shares at an average price of $53.59, represent-
ing 30 million common shares at an average price of
$53.87 during the nine months ended September 30,
2005 (prior to the spin-off of Ameriprise) and 4 million
common shares at an average price of $51.33 during the
three months ended December 31, 2005 (after the spin-
off of Ameriprise). The lower repurchase activity during
2005 versus prior years reflects a more measured
approach to repurchases in light of the capital implica-
tions of the Ameriprise spin-off. Since the inception
of the share repurchase program in September 1994,
530 million shares have been acquired under total
authorizations to repurchase up to 570 million shares,
including purchases made under past agreements with
third parties.
Cash Flows
Cash Flows from Operating Activities
For the year ended December 31, 2005, net cash pro-
vided by operating activities was $8.0 billion. The Com-
pany generated net cash provided by operating activities
in amounts greater than net income for both the years
ended December 31, 2005 and 2004 primarily due to
provisions for losses and benefits, which represent
expenses in the Consolidated Statements of Income but
do not require cash at the time of provision. Similarly,
depreciation and amortization represent non-cash
expenses. In addition, net cash was provided by fluctua-
tions in other operating assets and liabilities. These
accounts vary significantly in the normal course of busi-
ness due to the amount and timing of various payments.
Net cash provided by operating activities was higher in
2004 than 2003, as a result of higher net income in
Financial Review
AXP / AR.2005
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