Benefits from a stabilizing economy and improving interest-rate scenario have well positioned the investment management industry, which performed well during the first three months of 2018.
After three straight quarters of muted activities, it appeared that volatility was back in the markets in the just-concluded quarter, with extremities in February and March. This resulted in higher trading activities, and increased fixed income and equity revenues, primarily for investment banks.
Also, most investment managers have waived off majority of their fees with the rates rising since 2016 and this decline in fee waivers supported their quarterly results. Also, it is expected to continue aiding top-line growth in the upcoming quarters.
Notably, as investment brokers earn interest income on un-invested cash in customer accounts, the rate hikes will enable them to invest at higher rates. Thus, brokerage firms will likely engage in more investment activities as rates continue to increase, which will further boost their interest income.
Therefore, we are focusing on two investment brokers, TD Ameritrade Holding Corp. (AMTD - Free Report) and The Charles Schwab Corp. (SCHW - Free Report) , which seem to be well positioned for the future, due to their underlying strength and growth prospects.
TD Ameritrade has a market cap of $34.39 billion and provides securities brokerage services and technology-based financial services to retail investors, traders and independent registered investment advisors. On the other hand, Schwab, with a market cap of $77.15 billion, is a leading discount brokerage firm, which provides securities brokerage, banking and other financial services to individual investors, institutional clients and other broker-dealers.
Both, TD Ameritrade and Schwab currently carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Though both brokerage firms have similar business trends, deeper research into the financials will help decide which investment option is better.
While, both the firms have outperformed the industry (up 6.8%) so far this year, TD Ameritrade’s performance has been better. Its shares have surged 20.1% year to date compared with 14.3% rally of Schwab’s shares.
While both the companies have been deploying capital in terms of dividend payments to enhance shareholder value, TD Ameritrade has an edge over Schwab in this case. This is because TD Ameritrade has a dividend yield of 1.37% while Schwab has a dividend yield of 0.68%.
Moreover, TD Ameritrade’s current dividend yield also compares favorably with the industry average of 1.25%.
Here, Schwab seems to be better positioned than TD Ameritrade. While both the companies have a debt-to-equity ratio higher than the industry (0.24), Schwab’s debt-to-equity ratio of 0.30 is lower than TD Ameritrade’s ratio of 0.37.
Return on Equity (ROE)
ROE is a measure of a company’s efficiency in utilizing shareholder’s funds. ROE for the trailing 12-months for TD Ameritrade and Schwab is 19.66% and 17.20%, respectively. While both companies have a greater ROE than their peers (the industry has an ROE of 10.34%), TD Ameritrade seems to be better positioned, in terms of reinvesting its earnings when compared with Schwab.
Earnings Growth Projections
For TD Ameritrade, the Zacks Consensus Estimate for earnings per share is pegged at $3.18 for fiscal 2018, representing year-over-year growth of 72.8%. The stock has long-term expected earnings per share growth rate of 25.6%.
For Schwab, the Zacks Consensus Estimate stands at $2.42 for 2018, reflecting a year-over-year increase of 47.6%. The stock has long-term expected earnings per share growth rate of 11.5%.
This round is biased toward TD Ameritrade.
Sales Growth Projections
For TD Ameritrade, the Zacks Consensus Estimate for sales is $5.40 billion for fiscal 2018, reflecting 46.8% rise from the prior year.
For Schwab, the consensus estimate for sales stands at $10.18 billion for 2018, indicating growth of 18.1% year over year.
Therefore, TD Ameritrade has an edge here as well.
Our comparative analysis shows that TD Ameritrade is better positioned than Schwab when considering dividend yield, earnings and sales growth expectations, reinvesting potential as well as price performance. Schwab wins only on better leverage position.
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