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Charles Schwab Stock and Valuations Rose on 3Q Performance

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Rising assets and trades

Charles Schwab’s (SCHW) stock has risen 23% during the past three months, mainly due to higher assets, strong operating performance, and improving broad markets. From a fundamental viewpoint, Charles Schwab is focusing on services and technology to add new clients and assets. Charles Schwab’s daily average trades have risen on a year-over-year basis. However, average commissions have continued to fall.

In 3Q16, Schwab declared a dividend of $0.07 per share, which is a rise of 17% as compared to the prior-year quarter and is in line with its 20%–30% target payout ratio. The dividend translates into an annualized yield of 0.8%.

Below is a comparison of dividend yields for Schwab’s peers in the brokerage industry:

  • Interactive Brokers Group (IBKR): 1.0%
  • TD Ameritrade Holding (AMTD): 1.8%
  • E*TRADE Financial (ETFC): 0%

Together, these companies make up 1.3% of the Vanguard Financials ETF (VFH). The company is expected to reward shareholders with a 20%–30% earnings payout in the upcoming quarters.

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Valuations

Currently, Schwab is trading at a one-year forward PE (price-to-earnings) ratio of 24.2x. Its peers in the brokerage industry are trading at an average one-year forward PE ratio of 22.4x. Historically, the company has garnered premium valuations on a strong brand, expanding client base, and banking assets.

The company’s valuation has risen amid declining average commissions from rising competition. Its client assets expanded to $2.7 trillion at the end of 3Q16, a rise of 4% as compared to the previous quarter. The company is expected to see higher advisory and interest revenues in the upcoming quarters as it garners more assets. A rise in interest rates by the Fed could trigger higher volatility in 4Q and lead to higher trades.

Historically, Schwab has traded at a one-year forward PE ratio in the range of 22x–30x. In 4Q, Charles Schwab is expected to post EPS of $0.35, reflecting strong growth across parameters.

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