The Impact of the Coronavirus on Schwab
2020 has been a disappointing year for Charles Schwab shareholders, as the onset of the Coronavirus pandemic created a crash in the stock market. Overall, a sharp drop in total client capital, coupled with the overall negative market sentiment, were the main reasons behind the sell-off in Schwab’s stock. The move to no cost investing and the Fed keeping interest rates anchored near 0% through 2023 has been a challenge for Charles Schwab and other retail brokers to overcome.
Charles Schwab stock price 37.73. It is down 20.67% this year, while the S&P 500 is up 4.64%. Over the past 3 months, it’s been up 13.00%, and it’s up 5.39% over this past month, showing little price volatility. The decline in Schwab’s stock price was accompanied by a strong reduction in total client assets and an increase in customer cash as a % of customer assets in February compared to January. The largest driver of the company’s earnings is net interest income, which in recent quarters has made up around 60% of net revenue. Rates gradually declined in 2019 and into the first couple of months of 2020. However, in March 2020, the Federal Reserve dramatically cut the interest rate to 0%-0.25% to deal with the economic downturn caused by the coronavirus. This made it harder for Schwab to make money from brokerage activity (especially with new initiatives like zero commissions on trades, zero account minimums, low cost mutual funds) and its banking business.
Americans Line up in Droves to Invest
So how does Charles Schwab plan to continue making profits and recover strongly from the impact COVID-19 has dealt it? For one thing, masses of Americans, especially younger ones, received $1200.00 stimulus checks and became more engaged with their money, deciding to put a piece of it into the stock market. When the stock market crashed this past March, many people saw volatility on Wall Street, and thus seized on the opportunity to grow their money because of it. Bolstered by zero-commision trading and fractional shares, people lined up in droves to open up brokerage accounts. The major online brokers: Charles Schwab, TD Ameritrade, E-Trade, and Robinhood, saw new accounts grow as much as 170% in the first quarter, when stocks experienced the fastest bear market and the worst first quarter in history. Charles Schwab CFO Peter Crawford commented, “We continue to drive strong business momentum; August new accounts and core net new assets were among the highest we’ve seen for a summer month in recent years, and client assets reached a record $4.49 trillion at month-end, up $773 billion, or 21%, year-over-year. Thus far in the third quarter, equity market returns have been quite strong and client trading activity very robust relative to prior years. In my opinion, this should only push Charles Schwab’s stock price higher.
A Game-Changing Acquisition
Another feather in Schwab’s cap is that because of the Federal Reserve’s amenable monetary policy, the company’s financials will likely get support from inorganic growth efforts, due to three M&A it made pre-coronavirus, including a 26 Billion dollar one with competing online broker TD Ameritrade. The timing of these couldn’t have worked out better for the company, because not only has the coronavirus pandemic slowed merger and acquisitions (M&A) activity in the financial sector, it has even forced many banks to terminate deals.
Morningstar, who already considered Charles Schwab to be a wide moat, believes that later this year, it should close on its acquisition of TD Ameritrade. They go on to say that, “analysts believe Schwab can take as much as $2 billion of operating expenses out of Ameritrade over three years, which would lead to 25% earnings accretion. It might not fully offset the loss of income from lower interest rates, but the combined firm should be much stronger competitively than Schwab is today.” After its merger with TD Ameritrade is fully completed, Schwab will have created a combined institution with $5.1 trillion in assets under management and 24.1 million brokerage accounts, serving 14,500 registered investment advisors. Charles Schwab also estimated that the deal would result in $3.5 billion to $4 billion in savings over time.
Own Your Tomorrow
By investing in Charles Schwab, I believe you are buying a well managed, dividend paying, long term value stock. The company’s CEO, Walt Bettinger, has been in his position for almost 12 years. The management averages 3 years together. And the Board of Directors have been in place for just about 9.5 years. This is a company with a strong management team.
For those who only invest in companies which have stable dividends that have grown over time, “Talk to Chuck.” The company has been paying out a stable dividend since 1989. The last two years the dividend has been its largest ever, with a 1.91% yield this year. It has also steadily grown over the past 10 years. Lastly, it is expected to be covered by earnings for at least the next 3 years. This is another reason to own Charles Schwab.
I see Charles Schwab as a value stock. It carries a Forward PE Ratio of 15.1x, below the 17.9x of the US Market. By investing in Schwab, you’re buying a company at a material discount, because Wall Street is focusing on The Fed’s low interest rates instead of what lies ahead for it in the next 18-36 months. Yes, you have to be a patient investor. The American economist Paul Samuelson put it like this, “investing should be more like watching paint dry. If you want excitement, take $800 and go to Las Vegas.” If your investing principles align with his first statement, you’re buying stock in a company that might report slow earnings because of low interest rates for some time, but the payoff of when Schwab and TD Ameritrade come together as a whole will make your wait well worth it. Keep in mind, the acquisition will produce a combined organization with $5.1 trillion in assets under management and 24.1 million brokerage accounts, serving 14,500 registered investment advisors. Charles Schwab has also estimated that the deal would result in $3.5 billion to $4 billion in savings over time. This will make Charles Schwab the industry leader in retail brokerage. Also, DISFOLD ranked the top 30 American financial companies 2020, listing Schwab as number 16. Just think, in between 11/2 to 3 years, Schwab will be one of the biggest players in the whole financial sector. I see a strong case for an investment in Schwab at a very nice price.
Disclaimer: This material should not be considered investment advice. After Further Review…The Stock is Reversed or Bob Schless are not registered, investment advisors. Under no circumstances should any content from this blog, website, articles, videos, seminars or emails from After Further Review…The Stock is Reversed or Bob Schless should be used or interpreted as a recommendation to buy or sell any type of security or commodity contract. This material is not a solicitation for a trading approach to financial markets. Any investment decisions must in all cases be made by the reader or by his or her registered investment advisor. This information is for speculative purposes only.