American Express 2006 Annual Report Download - page 32

Download and view the complete annual report

Please find page 32 of the 2006 American Express annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 116

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116

[ 30 ]
2006 fi nancial review
american express company
FINANCIAL REVIEW
The financial section of American Express Company’s
(the Company) Annual Report consists of this Financial
Review, the Consolidated Financial Statements and
the related notes that follow. The following discussion
is designed to provide perspective and understanding
to the Company’s consolidated financial condition and
results of operations. Certain key terms are defined in
the Glossary of Selected Terminology, which begins on
page 60.
EXECUTIVE OVERVIEW
American Express Company is a leading global
payments, network, and travel company. The Company
offers a broad range of products and services including
charge and credit cards; stored value products such as
Travelers Cheques and gift cards; travel agency services;
travel and business expense management products and
services; network services and merchant acquisition and
merchant processing for the Company’s network partners
and proprietary payments businesses; lending products;
point-of-sale and back-office products and services for
merchants; magazine publishing; and international
banking products. The Company’s various products and
services are sold globally to diverse customer groups,
including consumers, small businesses, mid-market
companies, large corporations, and banking institutions.
These products and services are sold through various
channels including direct mail, on-line applications,
targeted sales forces, and direct response advertising.
The Company generates revenue from a variety of
sources including payment products, such as charge and
credit cards, travel services, and stored value products,
including Travelers Cheques. Charge and credit cards
generate four types of revenue for the Company:
• Discount revenue, which is the Company’s largest
revenue source, represents fees charged to merchants
when cardmembers use their cards to purchase goods
and services on the Company’s network;
• Finance charge revenue, which is earned on
outstanding balances related to the cardmember
lending portfolio;
• Card fees, which are earned for annual membership,
and other commissions and fees such as foreign
exchange conversion fees and card-related fees and
assessments; and
• Securitization income, net which reflects the net
earnings related to cardmember loans financed
through securitization activities. Refer to the
Glossary for further information.
In addition to funding and operating costs associated
with these activities, other major expense categories
are related to marketing and reward programs that add
new cardmembers and promote cardmember loyalty and
spending, and provisions for anticipated cardmember
credit and fraud losses.
The Company believes that its “spend-centric”
business model (which focuses on generating revenues
primarily by driving spending on its cards and secondarily
by finance charges and fees) has significant competitive
advantages. Average spending per cardmember,
which is substantially higher than for the Company’s
competitors, represents greater value to merchants in the
form of loyal customers and higher sales. This gives the
Company the ability to earn a premium discount rate
and invest in greater value-added services for merchants
and cardmembers. As a result of the higher revenues
generated from higher spending, the Company has the
flexibility to offer more attractive rewards and other
incentives to cardmembers, which in turn create an
incentive to spend more on their cards.
The Company creates shareholder value by focusing
on the following elements:
• Driving growth principally through organic
opportunities and related business strategies, as well
as joint ventures and selected acquisitions;
• Delivering returns well in excess of the Company’s
cost of capital; and
• Distributing excess capital to shareholders through
dividends and stock repurchases.
Overall, it is management’s priority to increase
shareholder value over the moderate to long term by
achieving the following long-term financial targets, on
average and over time:
• Earnings per share growth of 12 to 15 percent;
• Revenue growth of at least 8 percent; and
• Return on average equity (ROE) of 33 to 36 percent.
After the completion of the spin-off of Ameriprise
Financial, Inc. (Ameriprise) in 2005, the Company
raised its ROE target to 28 to 30 percent from its previous
target of 18 to 20 percent. Based on the Compa ny’s recent
financial performance and expectations regarding future
performance, the Company’s on average and over time
targeted ROE was increased again in late 2006 to 33 to
36 percent. The new ROE target reflects the success
of the Company’s spend-centric business model and
its effectiveness in capturing high spending consumer,
small business, and corporate cardmembers.