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What’s behind Charles Schwab’s Premium Valuations?

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Jan. 11 2018, Updated 10:31 a.m. ET

Higher valuation multiple

Charles Schwab’s (SCHW) price-to-earnings ratio stood at 24.10x on an NTM (next-12-month) basis compared to its peer average of 14.37x. Wells Fargo (WFC), Bank of New York Mellon (BK), and LPL Financial Holdings (LPLA) have price-to-earnings ratios on an NTM basis of 13.45x, 13.37x, and 16.29x, respectively.

Charles Schwab generated trading revenues of $500 million in 9M17 (the first nine months of 2017) compared to $623 million in 9M16, a 20% fall mainly due to the reduction in prices.

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Behind the rise and expectations

A possible reason for Charles Schwab’s higher valuations could be its one-year price target, which is higher than the current price. Wall Street analysts have given a one-year target of $53.18 on SCHW, a 3.2% rise from the current price of $51.52.

In 2018, Charles Schwab could witness a rise in its valuations mainly on the back of corporate tax rate reductions. Another factor that’s impacting the company’s valuations is a rise in the quarterly dividend payouts.

In October 2016, Charles Schwab declared a quarterly dividend of $0.07 per share, while in October 2017, it declared $0.08 per share. In 2018, the company is expected to declare total dividends of $0.38 per share.

On an LTM (last-12-month) basis, Charles Schwab had a price-to-earnings ratio of 32.97x, and peers (XLF) Bank of New York Mellon (BK), Wells Fargo (WFC), and LPL Financial Holdings (LPLA) have ratios of 15.90x, 15.92x, and 24.78x, respectively.

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