How Does Charles Schwab Compare to Peers on Valuation Multiple?



Equity returns

Charles Schwab’s (SCHW) stock has risen 6% over the past three months. The company is focusing on services and technology to add new clients and assets. It has substantially improved its client assets and net interest income. Charles Schwab’s daily average trades have increased, but commissions have declined marginally.

In 1Q16, Charles Schwab declared a dividend of $0.06 per share, which translates to an annualized yield of 0.9%. Below is a comparison of dividend yields of SCHW’s peers in the brokerage industry:

  • Interactive Brokers Group (IBKR) has a 1.1% dividend yield.
  • TD Ameritrade Holding Corporation (AMTD) has a 1.6% dividend yield.
  • E*TRADE Financial Corporation (ETFC) doesn’t pay dividends.

Together, these companies form 10.8% of the iShares U.S. Broker-Dealers & Securities Exchanges ETF (IAI). Charles Schwab is expecting to maintain a 20%–30% payout of earnings in the upcoming quarters.

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Advisory-based services

Charles Schwab is focusing on increasing client assets through advisory-based products, innovative ways of providing wealth management and retirement services, and deployment of technology for retail as well as institutional clients.

The increase in volatility due to global factors and a delayed hike in interest rates will likely benefit the company’s trading revenues. Charles Schwab is expected to benefit from its strong brand, innovative solutions, and banking products.

Valuations rise

Currently, Charles Schwab is trading at a one-year forward PE (price-to-earnings) ratio of 21.5x. Its peers in the brokerage industry are trading at an average one-year forward PE ratio of 19.3x. Historically, the company has traded at a premium to its peers because of its strong brand, large client base, and diversified assets.

The company’s valuation has risen over the past few months, mainly due to higher trades, increased volatility, and expanding assets. Its client assets remained strong at $2.6 trillion at the end of 1Q16. It’s expected to see higher interest revenues as it gathers more client assets in the upcoming quarters.

Historically, Charles Schwab has traded at a one-year forward PE ratio in the range of 21x–29x. The company will likely benefit from an increase in volatility on account of fluctuating oil and commodity prices as well as exchange rates. The trading activity in the US equity market is expected to be impacted by an interest rate hike.


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