TD Ameritrade Valued at a Discount, Expectation of Nominal Growth



High yields in past 12 months

TD Ameritrade (AMTD) stock has returned 11% over the past 12 months. It’s backed by nominal growth in client assets combined with strong growth in the Investment Products division.

The company rewards its shareholders through dividend and share repurchases. For 3Q15, TD Ameritrade declared a dividend of $0.15 per share, up 25% compared to the third quarter of the previous year. The dividend paid translates into an annualized dividend yield of 1.7%.

TD Ameritrade’s peers in the brokerage industry have the following dividend yields:

  • Interactive Brokers Group (IBKR)—1.06%
  • E*TRADE Financial Corporation (ETFC)—0%
  • Charles Schwab Corporation (SCHW)—0.74%

Together, these companies form 1.31% of the Financial Select Sector SPDR Fund (XLF).

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Improving valuations

Currently, TD Ameritrade is trading at 21x on a one-year forward earnings basis. Its peers are trading at 25x. Historically, TD Ameritrade has traded at a discount to its peers because of slightly lower operating margins. Its valuations have declined marginally over the past few months on nominal growth in client assets, average trading revenues, and consolidating growth from investment product fees.

On a trailing 12-month (or TTM) basis, TD Ameritrade is valued at a PE (price-to-earnings) ratio of 24x compared to the industry average of 40x.

The US market is expected to witness lower trading activity on account of uncertainty over the interest rate hike, the slowing Eurozone, and competitive China’s currency devaluation. The contraction of yields is having a negative impact on the company’s earnings. TD Ameritrade is expected to make up for lower activity through higher retail and institutional participation. The company is also banking on fee-based and advisory-focused product offerings. Its continuing investments in growth initiatives will likely drive future growth.


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