Shareholder Returns

Total Return to Shareholders_ American Express posted a slight gain (0.1 percent) in total shareholder return during 2002. This was in contrast to declines of 22 percent for the S&P 500 Index and 15 percent for the S&P Financial Index. Over the past five-year period, American Express' cumulative return to shareholders outperformed both the S&P 500 and S&P Financials.

Returns compounded on a monthly basis

The results we delivered for 2002 contributed to shareholder returns that surpassed the major market indices and most of our peer companies. For the year, American Express' total shareholder return was up 0.1 percent, compared with declines of 15 percent for the Dow Jones Industrial Average, 22 percent for the S&P 500 Index and 15 percent for the S&P Financial Index. Of course, it was difficult to find much to cheer about in the equity markets this past year, with continued volatility and lower values due to concerns about the economy, the global political situation and corporate ethics. While I am not satisfied by our stock performance on an absolute basis, I am pleased that we performed as well as we did relative to the market overall and to our peers.

With our improved business results and stronger financial position, the company reinstated its share repurchase program in June.

We continued to make our business models more adaptable and better able to navigate through both good and bad economic cycles. We delivered more than $1 billion in savings and improved major business processes through reengineering, expanded our use of the internet to serve customers, continued to diversify card spending by lowering our reliance on the travel and entertainment sector, forged partnerships that enhance our capabilities, and developed more sustainable sources of investment funding. These efforts have allowed us to generate solid growth in 2002 earnings, even in a weak environment, while also increasing marketing and other business-building initiatives.

In all, we ended the year energized and with a strong sense of momentum. Earlier than many of our competitors, we took the difficult, and sometimes painful, steps to prepare our business to compete effectively and prosper in the current environment. Just as important, we moved aggressively in the marketplace at a time when some of our traditional competitors were distracted by their problems and were not as prepared to deal with the difficult environment. As a result, we entered 2003 operating from a position of strength and on the offense.

We continue to believe our long-term financial targets of 12 to 15 percent earnings per share growth, 8 percent revenue growth and 18 to 20 percent return on equity, on average and over time, are appropriate. These targets have two key underlying assumptions: growth in the S&P 500 Index of 8 percent and card billings growth of 6 to 10 percent, both of which are considerably lower than the historical rates that we experienced over the past 20 years. We are confident in our ability to meet our long-term targets, even in a slower growth environment, because of the changes we have made to our business models.

Before moving on to a review of business unit results, I would like to address some important changes we made regarding our use of stock options. Following extensive review of our compensation strategy, we decided to reduce the number of option shares granted in 2003. As a result of the actions we have taken, the annual stock grants issued in January 2003 represented 1.1 percent of total shares outstanding, which is down significantly from 2.9 percent a year ago. In addition, we made the decision to expense options beginning with 2003 awards. We were able to make these and other changes while maintaining a total compensation program that will enable us to attract and retain highly talented employees, and to reward superior performance.