American Express Has Cut Its Share Count by 27% Since 2016. Here's What That Did for the Stock.

Companies that generate positive operating cash flow can allocate their capital in various ways. Of course, reinvesting in the business is what many long-term investors appreciate, as it can boost intrinsic value over time. There are also mergers and acquisitions, as well as paying down debt.

When it comes to returning capital to investors, companies can direct cash to dividend payments. Stock buybacks are another avenue to put money back into shareholders' pockets, particularly in a more tax-efficient manner.

American Express (NYSE: AXP) has been a leader in the latter category. The premium credit card enterprise reduced its outstanding share count by a notable 26.8% from Q3 2016 to Q3 2026 (ended Sept. 30). Here's what this did for the financial stock.

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Share buybacks lifted per-share earnings

Over the past decade, American Express has been a wildly successful investment asset. The stock produced a total return of 471% during that time (as of Nov. 4). This gain easily outpaced the S&P 500 index.

Profit growth is a critical catalyst that supports stock performance. From the third quarter of 2016 to the most recent quarter, American Express's diluted earnings per share (EPS) increased by 352%. This reveals major fundamental strength for the business.

The company's diluted EPS rose at a faster clip than net income, which was up 228% in the last 10 years. Share repurchases make up the difference. Every time the business chooses to conduct stock buybacks, it boosts the per-share profits attributable to each existing investor. In other words, shareholders see their ownership stakes steadily increase over time. This is a key part of the management team's capital allocation policy.

A high-quality compounder at a reasonable price

Investors shouldn't only buy a stock because the business is constantly repurchasing shares. There is always more to the thesis. That being said, American Express is a high-quality company that's worth looking into.

The business has established a strong position in the credit card market, with a wide economic moat supported by its robust brand, which attracts affluent customers, and its powerful network effect, which creates a positive feedback loop that improves the value proposition for consumers and merchants. These traits defend American Express's competitive standing.

At a forward price-to-earnings ratio of 16.2, I believe the large-cap stock is reasonably valued right now. It's not necessarily cheap or expensive.

However, the leadership team is aiming for EPS to rise at a mid-teens annualized pace in the long run. That's a realistic outlook. And should it prove to be true, it presents a durable tailwind for the stock price.

American Express is an advertising partner of Motley Fool Money. Neil Patel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends American Express. The Motley Fool has a disclosure policy.