Is Charles Schwab Stock a Buy?

Following a challenging period with rate hikes and client cash realignments, has Charles Schwab Corp recovered to become attractive for investors? 

For more than 40 years, Charles Schwab (NYSE:SCHW) has offered financial services, spanning wealth management, financial advisory, banking, and asset management services.

In its early days, the company functioned as a subsidiary of Bank of America. In March 1987, management bought back the company for $280 million, and in September that year, Charles Schwab Corp conducted its IPO.

Since then, Schwab has dealt with shifting investing cultures — the dot-com bubble burst and geopolitical and macroeconomic issues that cyclically put the market under duress.

Despite this choppy macroeconomic backdrop, the global financial services market is expected to expand at a CAGR of 7.6% in the upcoming years. So, what are its prospects now? Is it time to buy?

How Do Higher Interest Rates Affect Schwab?

Charles Schwab operates in an economy ravaged by high inflation and the Federal Reserve’s multiple interest rate hikes. Interest rates highly influence the company’s earnings.

While, in theory, high interest rates benefit a financial institution like Charles Schwab Corp, they also cause its funding costs to surge, which creates an adverse impact on its net interest revenue, as was seen in the recent Fed rate-hiking cycle.

Interest rate increases stand to reduce the fee revenue of the company’s bank deposit account as its consumers reallocate their assets from checking accounts to other higher-yielding alternatives.

This was seen last year when its net interest revenue was down 11.7% year-over-year to $9.43 billion. Its total net revenues decreased 9.3% from the year-ago value to $18.84 billion. Moreover, its bank deposit account fees declined 50% from the prior year to $705 million.

The high-interest rate environment and client cash realignment have caused its balance sheet to shrink as well. As of December 31, 2022, the company had $551.77 billion in total assets, which dropped by 10.6% to $493.18 billion as of December 31, 2023.

But Charles Schwab has reportedly seen fewer cash realignments since the first half of 2023. Macroeconomic factors have improved since then, with a prolonged drop in inflation and a halt in the Fed’s rate hikes. The impact of this improving macro background has been evident in management’s summer, fall, and winter updates.

At the end of 1Q 2023, the company had $535.55 billion in total assets, which declined by 4.5% to $511.51 billion in 2Q 2023 and further declined by 7.1% to $475.20 billion in 3Q 2023. However, after that, a turnaround was observed, possibly because of an end in the rate hikes and anticipations of rate cuts. Total assets rose 3.8% sequentially to $493.18 billion at the end of 4Q 2023.

The company’s bank deposits followed a similar path. From $325.75 billion in 1Q 2023, deposits declined 6.5% to $304.41 billion in 2Q 2023, then 6.6% to $284.41 billion in 3Q 2023.

Bank Deposits On The Rise

On the other hand, bank deposits rose by 1.9% sequentially to $289.95 billion in 4Q 2023. This was supposedly a result of client cash realignment activity hitting its slowest pace since the start of rate hikes in 3Q and continuing to moderate in 4Q.

Shares of SCHW also suffered due to strict monetary conditions over the past year. It has lost about 12%, hugely underperforming the broader market, as SPDR® S&P 500 ETF Trust (NYSEARCA:SPY) gained 28% over the same period. Over the past six months, the stock has returned roughly 13% versus SPY’s near 15% gains.

In addition, the company is likely to capitalize on its TD Ameritrade acquisition. In 2020, Schwab acquired TD Ameritrade for around $26 billion, which created the potential for 12 million incremental client accounts. Schwab has transitioned about 90% of Ameritrade clients to its platform.

What About Its Dividend?

Charles Schwab last paid a regular quarterly dividend of $0.25 per share on February 23, 2024. Its annual dividend of $1.00 yields approximately 1.5% at the current price level.

With a modest payout ratio of 44.9%, a history of growing dividends at more than 13.5% annually over the past five years and the company’s ability to generate higher free cash flow, its dividend payments look reliable.   

For income-oriented investors, a steady cash inflow on top of a steady eddy stock is attractive.

Is Charles Schwab Stock a Buy Now?

According to 19 analysts, Schwab is a buy now with upside of 7.2% to fair value of $71.42 per share.

The range of analysts estimates spans $58 per share at the low end to $85 per share at the high end of the range.

The company’s focus over 2023 had been on improving its liquidity, which it managed to do at the tail end. While “at least three rate cuts” that the Fed committee penciled in at the end of 2023 need to materialize still, Federal Reserve Chairman Jerome Powell believes that inflation is “not far” from the 2% target rate where the Fed starts cutting rates.

A reversal in the cash realignment strategy was already manifested in the company’s balance sheet at the tail end of last year. Hence, a rate cut situation might help the company to bolster its balance sheet.

Schwab is trading at a slight premium compared to its five-year average. Its trailing-12-month non-GAAP P/E of 21.79 compares to the five-year average of 19.64. 

It’s worth noting that a dividends stable growth model pegs fair value for Schwab at $67 per share, right in line with where the stock is trading.

Given its focus on liquidity improvement, a gradually improving economy, and the potential upsides of the financial services market, Charles Schwab stock has the potential to be a wise portfolio addition at the current price level.

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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.