Does Charles Schwab Offer Investors Safety?
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Charles Schwab (NYSE: SCHW) has been a standout name in the investment brokerage industry for decades. Investors have liked the company because of its fiscal responsibility and quality management. Has Charles Schwab done enough to maintain this reputation? Is there a better option in the space?
Charles Schwab has consistently improved revenue over the past three years. Revenue also increased 8.50% last quarter on a year over year basis. However, earnings have been inconsistent.
The good news is that Charles Schwab is consistently profitable. Over the past five years, diluted EPS ranged between $0.38 and $1.05. Investors liked the 5.60% year over year earnings increase last quarter, which helped drive the stock price higher.
For the most part, the industry has traded together, but it’s always nice to see when your investment comes in first place. An added bonus is the 1.10% yield. That said, TD AMERITRADE currently yields 1.50% in dividends. Unfortunately, E*TRADE doesn’t offer any yield. However, you shouldn’t knock E*TRADE for this. It has too much debt to offer such a luxury.
Charles Schwab, on the other hand, has a very strong cash position, which increases the likelihood of more capital being returned to shareholders in the future.
Below are the debt-to-equity ratios for each company:
- Schwab: 0.17
- E*TRADE: 1.57
- TD AMERITRADE 0.28
Charles Schwab and TD AMERITRADE have excellent debt management, while E*TRADE has been working to improve in this area for many years.
What about valuation and profit margin?
By this point, it should be evident that E*TRADE is the riskiest investment. There would be little sense investing in a company that has similar valuation to peers while having debt issues and a negative profit margin.
The irony here is that the short position on Ameritrade (11.10%) is higher than the short position on E*TRADE (6.40%). For the record, Charles Schwab has a short position of 4.20%.
Company positives and negatives
Charles Schwab's impressed last quarter, but this should come as no surprise to those who are familiar with the the company; it has a history of beating expectations. And companies with that kind of history tend to keep the trend going.
Daily Active Trades (number of trades made on a daily basis) have improved for Charles Schwab. I’ll refer to Daily Active Trades as DAT from this point forward. In April, DAT improved 2% year over year. And in May, DAT improved 17% year over year. Have you noticed the stock’s significant upward move over the past month and a half? This isn’t a coincidence. However, those aren’t the only positives. Below is a chart showing more important numbers for May:
Overall, those are impressive numbers.
Other positives for Charles Schwab include revenue stream diversification, product and service innovation, and strategic acquisitions.
The biggest negatives have been higher operating expenses and increased loan loss provisions.
It should also be noted that interest rates still play a big role. Charles Schwab wants to see higher rates so it makes more profit on loans. The catch here is that the stock market often falls when interest rates increase. This has been true since time eternal. Therefore, pundits who think higher interest rates will help the stock market are likely being overly ambitious. If interest rates increase and the stock market falls, then it will impact Charles Schwab in a negative manner, because fewer retail traders would be interested in the company’s services.
Charles Schwab is enjoying strong upside momentum at the moment. Though the stock is a little expensive, it still looks to be a worthwhile investment.
Charles Schwab has $34.37 billion in cash and short-term equivalents versus $1.63 billion in long-term debt. This strong cash position opens many doors. If the market were to turn to the downside, Charles Schwab could return more capital to shareholders through increased dividends and/or stock buybacks.
If the stock market performs well, then Charles Schwab should build on its current momentum.
Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends TD Ameritrade. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!