Charles Schwab (NYSE:SCHW) needs no introduction as a goliath in wealth management, financial advisory, banking, and asset management services, overseeing $10.1 trillion.
Somewhat surprisingly, Schwab started 50 years as an investment advisory newsletter operator in the 1960s but by 1975 when brokerage commissions were deregulated, Charles Schwab seized the opportunity to open a discount brokerage, which at the time was highly disruptive.
Over the years, Charles Schwab has seen it all: A buy and buyback of the company from the Bank of America, market crashes, the dot com bubble, and numerous macroeconomic and geopolitical skirmishes that happen from time to time.
Recently, financial markets have been faced with the impact of the higher interest rates and that has been a boon to Charles Schwab, which saw its stock climb by 30%.
While the past year’s upward trajectory has been quite good, can the stock post a double from here on out?
Are Higher Interest Rates Good or Bad for Schwab?
After a period of sustained high rates championed by Federal Reserve Chairman Powell, inflation started to come down, Thereafter, following a lot of anticipation, the Fed started to cut interest rates last year. But the December jobs report shows notable employment gains, so that could dampen the Fed’s vigor to cut rates this year, and that in turn has analysts more on edge about where financial stocks can go.
Financial institutions like Charles Schwab face an iffy predicament during a high interest rate period. On paper, these companies should benefit from a high interest rate environment. But, against the current macro backdrop, Charles Schwab has faced something called cash realignment whereby consumers move money from banks into higher-yielding products.
This had initially affected the company’s financials, but the situation has turned out well subsequently with Schwab seeing a deceleration in the cash realignment activity for some time now. In its last update (the Winter update), the company reported that realignment activity was still trending lower, and in the second half of last year, it saw a rise in transactional sweep cash.
The company also completed the largest integration in its history. For quite some years now, Charles Schwab has been trying to integrate the customers of its acquired stockbroker TD Ameritrade. Finally, last year, the company completed this monumental task, resulting in 17 million additional accounts and $1.9 trillion in assets.
How Is Charles Schwab Performing Now?
When Charles Schwab last reported its fiscal 2024 results management announced a 4% leap in net revenues from the prior year to $19.61 billion. It has also seen an uptick in asset gathering and new account formation.
Core net new assets jumped by 20% over the year, while there was a 10% increase in the number of new brokerage accounts. The company is highly profitable and posted an increase in profit margin on a pre-tax basis of 41.5%.
For Q4, results have been even better with net revenue jumping by 20% year-over-year to $5.33 billion. The bottom-line financial growth eclipsed the top line with pretax profit margin grew from 36% to 46.6% on an adjusted basis. Another stunning metric was the 36% return on common equity for the quarter, likely a reason that top funds like Generation Investment Management hold Schwab as a major position.
Exemplary results were also due to higher asset management fees. Total client assets rose 19% to $10.10 trillion for the quarter, while asset management and administration fees, which are earned from managing mutual funds and exchange-traded funds, increased by 22% to $1.51 billion. SCHW share price got a boost as a result of this.
Can Charles Schwab Stock Double?
Although 15 analysts have revised their earnings estimates higher for the upcoming quarter, Charles Schwab stock is unlikely to double anytime soon because of its high price-to-earnings ratio of 27.3x.
Growth on the bottom line is expected to tick up at a rapid pace of 18% annually over the next 5 years but that’s still going to be hard to justify a doubling of the share price in the next year, however over a five year time horizon it’s quite possible.
Charles Schwab has the full right to toot its own horn having extricated itself from the cash sorting mess and successfully integrated TD Ameritrade clients but it remains to be seen what happens if the central bank’s tepid approach towards rate cuts persists.
There is enough to like about the stock for both value and income investors. Analysts forecast upside to $89.30 per share while a discounted cashflow forecast is, somewhat unusually, pinned at almost an identical level of $89.58.
The dividend of 1.22% is also an attractive quality for those income-seekers on the hunt for some stability but it’s not sufficiently compelling to trigger a purchase alone. Nonetheless, the company has maintained dividend payouts for a 36 year period without interruption, so those looking for a stable investment can likely count on an uninterrupted payout.
#1 Stock For The Next 7 Days
When Financhill publishes its #1 stock, listen up. After all, the #1 stock is the cream of the crop, even when markets crash.
Financhill just revealed its top stock for investors right now... so there's no better time to claim your slice of the pie.
See The #1 Stock Now >>The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.