American Express 2006 Annual Report Download - page 44

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2006 fi nancial review
american express company
return to shareholders a high percentage of its earnings
and capital generated due in part to its balance sheet
management activities that seek to optimize the level
of shareholders’ equity required to support its growth.
Assuming the Company achieves its financial objectives
of 12 to 15 percent EPS growth, 33 to 36 percent ROE
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 generated, subject to business mix,
acquisitions and rating agency requirements.
As described above, during 2006 the Company
raised its ROE target from a range of 28 to 30 percent to
a range of 33 to 36 percent. Important factors relating to
ROE include the Company’s margins, the amount and
type of receivables and other assets needed to generate
revenue, the level of capital required to support its assets,
and the mix between shareholders’ equity and other
forms of financial capital that it holds as a result of its
financing activities. In addition, in keeping with the
Company’s objectives regarding the return of excess
capital to shareholders, the Board of Directors of the
Company approved a 25 percent increase in the quarterly
dividend on the Company’s common stock from $0.12 to
$0.15 per share for the dividend paid to shareholders on
August 10, 2006 and future dividends. During 2006,
through dividends and share repurchases, the Company
returned approximately 93 percent of total capital
generated to shareholders in the form of $692 million in
dividends and $4.1 billion of share repurchases.
The Company maintains flexibility to shift capital
among business units as appropriate. For example, the
Company may infuse additional capital into subsidiaries
to maintain capital at targeted levels, considering debt
ratings and regulatory requirements. These infused
amounts can affect both the capital and liquidity levels for
American Express’ Parent Company (Parent Company).
The Company maintains discretion to manage these
effects, by issuing public debt and reducing 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 a share repurchase program to return
equity capital in excess of business needs to shareholders.
These share repurchases both offset the issuance of new
shares as part of employee compensation plans and
reduce shares outstanding. The Company repurchases
its common shares primarily by open market purchases.
Approximately 69 percent of capital generated
has been returned to shareholders since inception of
the share repurchase program in 1994. In May 2006,
the Company’s Board of Directors authorized the
repurchase of an additional 200 million shares of the
Company’s common stock. During 2006, the Company
purchased 75 million common shares at an average price
of $54.50. The Company repurchased a higher level of
shares in 2006 after activity was reduced in 2005 due
to the capital implications of the September 30, 2005
spin-off of Ameriprise. At December 31, 2006, there
were approximately 165 million shares remaining under
authorizations to repurchase shares approved by the
Company’s Board of Directors.
CASH FLOWS
Cash Flows from Operating Activities
For the year ended December 31, 2006, net cash provided
by operating activities was $9.0 billion. In 2005 and
2006, net cash provided by operating activities exceeded
net income, primarily due to provisions for losses and
benefits, which are 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 fluctuations in other operating assets and
liabilities (including the Membership Rewards liability).
These accounts vary significantly in the normal
course of business due to the amount and timing of
various payments.
Net cash provided by operating activities was
lower in 2005 than 2004 due to a decrease in net
cash provided by operating activities attributable to
discontinued operations.
Management believes cash flows from operations,
available cash balances and short-term borrowings
will be sufficient to fund the Company’s operating
liquidity needs.
Cash Flows from Investing Activities
The Company’s investing activities primarily include
funding cardmember loans and receivables and the
Company’s available-for-sale investment portfolio.
For the year ended December 31, 2006, net cash of
$15.2 billion was used in investing activities primarily due
to net increases in cardmember receivables and loans.
For the year ended December 31, 2005, net cash used
in investing activities increased from 2004. The increase
reflects net increases in cardmember receivables and loans
and cash retained by Ameriprise after the spin-off.