Charles Schwab Corp. SCHW remains well-positioned for growth, driven by higher rates, opportunistic acquisitions, and rising client assets. However, a mounting expense base and subdued trading revenues are worrisome.
The Winds at Schwab’s Back
High Interest Rates Unfurl a Profitable Net Interest Margin: Schwab’s net interest margin is poised to flourish in the near term, riding on the wave of prevailing high-interest rates. Building on past success, the company’s NIM soared to 1.98% in 2023 from 1.78% in 2022 and 1.45% in 2021 buoyed by lofty rates. Yet, due to soaring funding costs, NIM stumbled in the early months of 2024.
Despite the drag from high funding costs and low-yield assets nogging on the company’s balance sheet, the fortifying effect of high rates is anticipated to boost NIM to some degree. Our crystal ball forecasts NIM as reaching 2.13%, 2.83%, and 3.13% in 2024, 2025, and 2026 respectively.
Strategic Acquisitions Sow the Seeds of Growing Client Assets: Schwab’s proactive stance in broadening its client base through advisory solutions is now reaping rich dividends. The company witnessed a compound annual growth rate (CAGR) of 10.4% in advice solution revenues over the last five years (2018-2023). This momentum held steadfast in the first half of 2024.
The acquisitions of USAA’s Investment Management Company, Wasmer, Schroeder & Company, LLC, and Motif’s technology and intellectual property have not only bolstered the company’s presence but also diversified its revenue streams.
While Schwab snipped fees on select advice solution products, revenues in this segment sprouted as average client asset balances burgeoned. Total client assets at SCHW witnessed a 21.2% CAGR in the five years ended 2023, predominantly propelled by the acquisitions inked during the epoch. Our projections foresee a CAGR of 6.2% in total client assets by 2026.
Capital Distributions to Hearten Stakeholders: As of June 30, 2024, SCHW’s coffers boasted $25.4 billion in cash and cash equivalents, while total debt stood at $56.8 billion, a mixed bag.
The company’s staunch commitment to upholding a low-cost capital structure has been the springboard underpinning its capital distributions. In January 2023, the company declared a 14% uptick in its quarterly dividend, a rhythm it has faithfully maintained since then.
Dividend Yield
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The company has sprinkled its dividend with enthusiasm four times in the past five years. Although SCHW has a share repurchase plan tucked under its belt, it has momentarily pressed pause on it to enrich liquidity and whittle down debt. The company is eyeing a common dividend payout ratio of 20-30% of GAAP earnings. Schwab’s robust earnings lineage and reasonable liquidity augur well for sustaining these capital distributions.
The Boulders in Schwab’s Path
The Unyielding Expense Peak: Ascending operating costs threaten to snip Schwab’s bottom line. Despite a dip in expenses in the initial half of 2024, the metric underwent a 17.5% CAGR over the past five years (closing their chapter in 2023). This upsurge was fueled by lofty compensation packages, burgeoning benefit costs, and strategic acquisitions.
Expense Growth Trajectory
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Albeit management anticipates a mere 2% uptick in adjusted operating expenses this year, the company is set to maintain its investment spree to buttress long-term growth and consolidate business efficacy. Moreover, costs tethered to compensation, regulatory overheads, and strategic acquisitions are poised to elevate operating expenses in the nearby future.
Costs are pegged to diminish by 5.1% in 2024 but rear their head with a 2.3% surge in 2025.
Tepid Trading Revenues: Despite recent amelioration in capital markets’ performance, Schwab’s trading revenues are anticipated to embark on a sluggish trajectory for the foreseeable future.
Schwab witnessed a decline in trading revenues in 2022, 2023, and the inaugural six months of 2024, symptomatic of lackluster market volatility and dwindling client engagements. Nevertheless, SCHW has unfurled numerous initiatives and seized strategic acquisitions to cultivate a client base and enrich its trading revenue.
Nevertheless, the uncertain performance pulse of capital markets raises a caution flag regarding prospective growth in trading revenues. Additionally, the prevailing geopolitical backdrop intimates that volatility and client zeal might not witness a marked improvement in the near term.
SCHW currently nestles a Zacks Rank #3 (Hold). Year-to-date, the company’s shares have wilted by 7.6%, floundering against the industry’s stalwart stride of 14.2%.
Year-to-Date Price Performance
Image Source: Zacks Investment Research
Peer Stocks Worth a Ponder
Hovering on the horizon are some of Schwab’s peers that might tickle investors’ fancies — Robinhood Markets, Inc. HOOD and Interactive Brokers Group, Inc. IBKR.
Prognoses for HOOD’s earnings for the ongoing year have undergone a 38.2% upward revision in the last 60 days. The company’s shares have surged by 33.1% over the past half-year. HOOD is currently waving the Zacks Rank #1 (Strong Buy) flag high.
Estimates for IBKR’s earnings for this fiscal year have held steady over the past month. The company’s shares have ascended by 21.6% over the last six months. IBKR sports a Zacks Rank #2 (Buy) at present.