The Charles Schwab Corp. (SCHW) has been at the forefront of major changes in the brokerage industry over the past six decades. It was among the very first to offer discounted brokerage commissions when the Securities and Exchange Commission abolished the old fixed-fee system in favor of market competition on May 1, 1975, writes Doug Gerlach, editor of Investor Advisory Service.
More than 30 years ago it led the development of a service model dedicated to independent investment advisors. Today, Schwab Advisor Services constitutes over 40% of the assets under Schwab’s custody. The firm was also among the first to eliminate commissions on most stock trades in the fall of 2019.
Long-term growth should be driven by several favorable factors. Schwab’s net new organic assets are projected to grow 5%-7% per year. The percentage of customers paying for investment advice should continue rising as the penetration rate of former TD Ameritrade customers closes the gap with legacy Schwab customers.
These customers are more profitable to Schwab. There is also more room for improved net interest margin. Its securities portfolio yields less than 2%, well below available market yields. This should remain true despite anticipated cuts in the federal funds rate.
We model 10% annual revenue growth, but 16% EPS growth, over the next five years as a rising net interest margin and cost discipline lead to improved operating margins. Also aiding growth is a return to stock buybacks in the second quarter. In five years, EPS could be as high as $7.86.
Applying a high P/E ratio of 27.8 could result in a stock price as high as 218. Adding in its moderate dividend yield, the total return could approach 20% annually.
We estimate the downside risk as 33% to 62. The selected low price approximates both Schwab’s 52-week low and the multiple of its low P/E of 16.5 and trailing 12 months EPS of $3.74.
Recommended Action: Buy SCHW.
