We have issued an updated research report on The Charles Schwab Corporation SCHW on May 26, 2015. As the company’s business is highly sensitive to the interest rates, the current low rate environment has been exerting continuous strain on its revenues.
The company has been forced to waive fees that it charges for managing funds. Fee waivers have increased at a 4-year CAGR of 9.8% (2011–2014). This is putting pressure on the company’s top line. Hence, we believe that unless rate environment reverses substantially, this would continue to adversely impact Schwab’s organic growth prospects.
Apart from this, mounting expenses also remains a major concern for Schwab. The company’s expenses increased at a CAGR of 6.1% over the last 4 years (2011–2014), with the first quarter of 2015 reflecting the same trend. We anticipate that costs pertaining to compensation and regulatory spending will keep overall expenses high in the upcoming quarters.
Additionally, owing to all these concerns, analysts have been lowering their estimates. Over the last 30 days, the Zacks Consensus Estimate fell 1.9% for both 2015 and 2016 to stand at $1.05 per share and $1.52 per share, respectively.
However, Schwab remains focused on a low-cost capital structure and targets a long-term debt-to-total financial capital ratio of less than 30%. Also, helped by its favorable capital position, management has been able to pay dividends continuously. The company presently targets cash dividend in the range of 20–30% of net income.
Currently, Schwab carries a Zacks Rank #4 (Sell).
Stocks Worth Considering
Some investment brokerage stocks that are worth a look include E*TRADE Financial Corporation ETFC, JMP Group LCC JMP and WisdomTree Investments, Inc. WETF. All these stocks hold a Zacks Rank #2 (Buy).
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