Charles Schwab Corp. SCHW remains well positioned for growth, driven by higher interest rates, opportunistic acquisitions and rising client assets. However, a rising cost base and subdued trading revenues are a concern.

Tailwind for Schwab

High interest rates to improve the net interest margin: Schwab’s net interest margin (NIM) is expected to improve in the near term, supported by the existing high-yield scenario. The company’s NIM increased from 1.78% in 2022 and 1.45% in 2021 to 1.98% in 2023 due to high interest rates. However, NIM did not see any growth in the first half of 2024 due to rising funding costs.

Although high financing costs and low-yielding assets on the company’s balance sheet are expected to weigh on the metric to some extent, high interest rates are likely to support NIM to some extent. We forecast NIM to be 2.13%, 2.83% and 3.13% in 2024, 2025 and 2026, respectively.

Strategic acquisitions to increase client assets: Schwab’s proactive efforts to expand its advisory solutions client base are bearing fruit. The company’s advisory solutions revenues have shown a compound annual growth rate (CAGR) of 10.4% over the past five years (2018-2023), and this momentum continued into the first six months of 2024.

The acquisitions of USAA’s investment management company, Wasmer, Schroeder & Company, LLC, and Motif’s technology and intellectual property have strengthened the company’s presence and diversified its revenues.

Although the company reduced fees on certain advisory solutions products, revenue from these offerings increased as clients’ average asset holdings improved. SCHW’s total client assets experienced a compound annual growth rate of 21.2% over the five years to 2023, primarily due to acquisitions completed during that period. Our estimates for total client assets assume a compound annual growth rate of 6.2% through 2026.

Promoting capital distributions: As of June 30, 2024, SCHW’s cash and cash equivalents were $25.4 billion, while total debt (consisting of long-term debt, borrowings from the Federal Home Loan Bank, and other short-term borrowings) was $56.8 billion.

The company’s focus on maintaining a low-cost capital structure has supported its capital distributions. In January 2023, the company announced a 14% increase in its quarterly dividend and has maintained that amount since then.

Dividend yield

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The company has increased its dividend four times in the last five years. Although SCHW has an existing share repurchase plan, it has been temporarily suspended to increase liquidity and reduce debt. The company targets a common dividend payout ratio of 20-30% of GAAP earnings. Schwab’s earnings strength and good liquidity will keep capital distributions sustainable.

The story continues

Obstacles for Schwab

Increasing the cost base: Rising operating costs are expected to weigh on Schwab’s bottom line. Although costs declined in the first half of 2024, the metric has seen a compound annual growth rate of 17.5% over the past five years (through 2023). This increase was driven by high compensation, benefit costs and acquisitions.

Cost growth trend

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Although management expects adjusted operating expenses to increase only 2% this year, the company expects to continue investing to support long-term growth and solidify business efficiencies. In addition, compensation and regulatory expenses, as well as strategic acquisitions, are expected to keep operating expenses elevated in the near term.

Spending is expected to fall by 5.1 percent in 2024, but rise by 2.3 percent in 2025.

Subdued trading revenues: Although capital markets have improved recently, Schwab’s trading revenues are expected to remain under pressure for some time.

The Company’s trading revenues declined in 2022, 2023 and the first six months of 2024 due to subdued market volatility and lower client activity. However, SCHW has undertaken several initiatives and opportunistic acquisitions to build a client base and increase its trading revenues.

Nevertheless, uncertainty about the development of capital markets raises concerns about potential growth in trading revenues. In addition, the ongoing geopolitical environment suggests that volatility and client activity are unlikely to improve significantly in the near future.

SCHW currently has a Zacks Rank #3 (Hold). Year-to-date, the company’s shares have lost 7.6%, lagging the industry’s growth of 14.2%.

Price development since the beginning of the year

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Schwab’s comparable stocks worth considering

Some better-rated stocks from Schwab’s competitors worth considering are Robinhood Markets, Inc. HOOD and Interactive Brokers Group, Inc. IBKR.

Estimates for HOOD’s current year earnings have been revised upward by 38.2% over the past 60 days. The company’s shares have risen 33.1% over the past six months. HOOD currently has a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks Rank #1 stocks here.

Estimates for IBKR’s current year earnings remained unchanged last month. The company’s shares have gained 21.6% over the past six months. IBKR currently has a Zacks Rank #2 (Buy).

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