Last week, Schwab reported Q4 earnings of $.62, slightly missing estimates of $.64. Despite the headline miss, results were solid with healthy organic asset growth of $66.2b for Q4 representing full year growth of 7%. Total client assets rose to $4.04T, surpassing the $4 trillion mark for the first time. Asset growth should remain healthy heading into 2020 with the expected closing of two acquisitions – USAA Investment Management and TD Ameritrade.
Current Price: $ 48.45 Price Target: $53
Position Size: 2% Performance since initiation on 6/24/19: 24.8%
Q4 Highlights:
- Core asset growth of 7% for 2019
- Core net new asset growth of $66.2b for quarter and $211.7b YTD
- Growth in Advisor services 10% YoY
- Net interest margin
- Deposits grew qoq from $208.6m to $211.1m as cash sorting (moving sweep assets into other higher yielding vehicles) pressures abated
- Net Interest Margin (NIM) was 2.34% decreased only 9bips given lower rates.
- Asset Management and trading
- Schwab Index Mutual Funds $323.3b up 30% YoY
- Schwab Index ETFs $163.8b up 42% YoY
- Trading revenue fell to $86m down 58%, but is only 6% of revenue
- Profitability – industry leader
- ROE 19% and 45.2 pre-tax profit margin
- Expenses up only 5%
- Capital allocation
- Repurchased 6.4m shares during quarter for $230m. $2.8b remains of authorized buyback. Buyback yield of 2.13%
- Dividend yield of 1.4%
- Shareholder yield of 3.5%
Schwab Thesis:
· Expect Schwab’s vertically integrated business model to drive AUM growth. Schwab has averaged 6% organic core net new asset growth as retail clients and advisors are attracted to Schwab’s low cost trading and custody services.
· Conservative, well-managed firm who is a leader in online trading and focused on leveraging platform.
· Schwab is on the cusp of generating excess capital which they plan to return to shareholders. Expect a 20%-30% payout ratio for dividends (1.7%) and management has approved a $4b share buyback which could amount to 4% to 5% of shares
($SCHW.US)
[category: Equity Earnings]
John R. Ingram CFA
Chief Investment Officer
Partner
Direct: 617.226.0021
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square
Suite 500
Boston, MA 02109