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AMTD vs. SCHW: Which Brokerage Stock is Better Positioned?

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Benefits from an improving economy and higher interest rates have well positioned the investment management industry. As such, performance of Investment Management stocks, which are part of the Zacks Finance sector, on the S&P 500 index in third-quarter 2018 was quite impressive, with nearly 19% year-over-year earnings growth.

Now let’s focus on two major investment brokers, namely TD Ameritrade Holding (AMTD - Free Report) and Charles Schwab (SCHW - Free Report) , with market capitalization of $29.9 billion and $60.9 billion, respectively. Both are part of the same industry, which has a Zacks Industry Rank #62 (top 24%). Our back testing shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

In the quarters ahead, both TD Ameritrade and Schwab are expected to continue benefiting from increase in interest rates. Further, volatile markets are expected to support trading revenues. These factors will likely result in higher revenues and improved profitability. Further, both the companies are influenced by almost similar economic backdrop, as they have the same business operations.

Both TD Ameritrade and Schwab currently carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Let's take a closer look at how TD Ameritrade and Schwab are stacked up against each other in terms of certain key metrics.

Price Performance

So far this year, shares of TD Ameritrade have gained 8%, while Schwab has lost 12.2%. The industry has declined 17.5% over the same period. Hence, TD Ameritrade has clearly outperformed Schwab.

Year-to-Date Price Performance

Dividend Yield

Both the companies have been deploying capital in terms of dividend payments and share purchases to enhance shareholder value.

TD Ameritrade announced 43% dividend hike in October. Further, the company has a share buyback authorization in place. It has a dividend yield of 2.26%.

Dividend Yield: AMTD

Schwab had announced 30% dividend hike in July. Further, the company has a share repurchase authorization in place. It has a dividend yield of 1.15%.

Dividend Yield: SCHW

As you can see in the above charts, TD Ameritrade has an edge over Schwab, as the former’s dividend yield is not only better than the latter’s but is also above the industry average of 2.10%.

Return on Equity (ROE)

ROE is a measure of a company’s efficiency in utilizing shareholders’ funds. ROE in the trailing 12 months for TD Ameritrade and Schwab is 24.54% and 19.02%, respectively. While both the companies have a superior ROE than the industry average of 11.89%, TD Ameritrade is better positioned in terms of reinvesting earnings compared with Schwab.

Earnings Growth Projections

For TD Ameritrade, the Zacks Consensus Estimate for earnings per share is pegged at $3.97 for fiscal 2019, representing year-over-year growth of 18.9%. The stock has long-term expected earnings per share growth rate of 20.5%.

For Schwab, the Zacks Consensus Estimate stands at $2.44 for 2018, reflecting a year-over-year increase of 48.8%. The stock has long-term expected earnings per share growth rate of 16.4%.

Further, both the stocks have a Growth Score of B. Our research shows that stocks with a Style Score of A or B, when combined with a Zacks Rank #1 or 2, offer the best upside potential.

Thus, based on the earnings growth projection for the current year, Schwab has an edge over TD Ameritrade.

Sales Growth Projections

For TD Ameritrade, the Zacks Consensus Estimate for sales is $5.89 billion for fiscal 2019, reflecting 8.1% rise from a year ago.

For Schwab, the consensus estimate for sales stands at $10.13 billion for 2018, indicating 17.6% year-over-year growth.

Therefore, Schwab has an edge here as well.

Valuation

With respect to the PEG and cash/price ratios, TD Ameritrade look undervalued as both these ratios are below the respective industry averages. Additionally, the stock has a Value Score of B. Value Score condenses all valuation metrics into one actionable score that helps investors steer clear of ‘value traps’ and identify stocks that are truly trading at a discount. Our research shows that stocks with Style Scores of A or B, when combined with a Zacks Rank #1 or 2, offer the best upside potential.

However, Schwab looks overvalued with respect to PEG and cash/price ratios. Both these ratios are above the respective industry averages. Also, the stock has a Value Score of D.

Therefore, TD Ameritrade holds an edge over Schwab here.

Conclusion

Taking into consideration dividend yield, reinvesting potential, favorable valuation as well as price performance, our comparative analysis indicates that TD Ameritrade is better positioned than Schwab. Schwab wins only on earnings and sales growth projection.

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