American Express Debacle Highlights Better Alternatives

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By Jacob Maslow

Amex card in walletIf you’re looking to invest in a credit card company, American Express (NYSE:AXP) would have been your go-to choice. It’s not hard to understand why. Thanks to its return on common equity rate of 25.5% to 28.84%, American Express has been a solid stock. It produces solid revenue year after year and is one of the most widely recognized credit cards on the planet.

With that said, its recent announcement that its contract with the giant wholesaler, Costco, would be ending crushed its stock. The stock declined by as much as 6.4%. It closed at $80.48 recently.

As devastating as this may be to existing American Express shareholders, this is good news for investors looking for an alternative. While it’s still a good idea to invest in American Express, you probably would get more bang for your investment bucks if you invested in Discover Financial Services (NYSE:DFS). This company is the force behind the Discover Card and its return on common equity averages out at 26.38%. Moreover, it is only trading at 10.3 times 2016 earnings per share estimates. Compare this with American Express, which was trading at 13.1 times consensus estimates.

Discover Card still has a lot of room for growth. While American Express is a much bigger company and is more widely known, Discover Card is no laggard when it comes to adaption. Expect this financial services company to continuously improve over the years.

If you’re looking for a long-term strategic play, pay attention to Discover Financial Services or US Bank Corp (NYSE:USB). If you’re still unconvinced that Discover might be a good choice, just look at its five-year total return. If you reinvested the dividends that the company pays, Discover stock would have appreciated 377%. That is an eye-popping figure. In fact, it is the best performer among the top 30 US banks.

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