Charles Schwab (SCHW) increases dividend by 14%, but fee reductions will hit the bottom line.

Charles Schwab’s (NYSE:SCHW) dividend was increased by a solid 14%.  Its overall yield is now 0.76%. The firm started paying a dividend in 1990.

Charles Schwab is one of the largest discount brokers in the United States. It maintains operations in brokerage, asset management, third-party advisors, and banking. Charles Schwab is both focused upon online and in-store operations. It also provides custody of assets and operates in two divisions; Advisor Services and Investor Services. The bank is also very large, maintaining over $100 billion in deposits.The company was founded in 1971 and is based in San Francisco.

Charles Schwab has maintained a solid three-year growth rate of dividends of 8.8 percent. Charles Schwab currently ranks 7th in dividend yield within the large cap financial, national investment brokerage category. The quarterly dividend for the February payment will be $0.08 versus the prior year rate of $0.07 per share. Charles Schwab is not a member  of our Top 100 Dividend Stocks.  (see below).

The dividend will be paid at the new higher rate on February 24, 2017, to shareholders of record at close of business on February 10, 2017. Charles Schwab Corp. is currently priced at $42.16. Listed in the table below are the quarterly dividend payments since 2010.

Date Quarterly Dividend
2/10/2017 0.08
11/9/2016 0.07
8/10/2016 0.07
5/11/2016 0.07
2/10/2016 0.06
11/4/2015 0.06
8/5/2015 0.06
5/6/2015 0.06
2/5/2015 0.06
11/5/2014 0.06
8/6/2014 0.06
5/7/2014 0.06
2/5/2014 0.06
11/6/2013 0.06
8/7/2013 0.06
5/8/2013 0.06
2/6/2013 0.06
11/7/2012 0.06
8/8/2012 0.06
5/9/2012 0.06
2/8/2012 0.06
11/8/2011 0.06
8/10/2011 0.06
5/4/2011 0.06
2/9/2011 0.06
11/9/2010 0.06
8/11/2010 0.06
5/5/2010 0.06
2/10/2010 0.06


Analysis of Charles Schwab is based upon our five key criteria for the Top 100 list, which include;

Category Value Score
Dividend Yield 0.76% 396
Dividend Growth (3-7 year avg) 6.3% 286
Forward P/E 21.25 226
S&P Financial Rating A 120
Beta 1.30 200
Total Score 1,028

Additional Information;

% Yield 3 Year Div. Growth Rate 7 Year Div. Growth Rate BV 2016 P/BV Ratio 10 yr P/BV Low 10 yr P/BV High 5 yr low Yield % 5 yr max Yield %
0.76% 8.8% 3.8% 12.60 3.35 1.90 7.90 0.65% 1.98%

Positives;

  • Charles Schwab maintains an investment grade rating of A.
  • Charles Schwab has maintained a three-year growth rate of dividends of 8.8 percent.
  • Charles Schwab has paid out a dividend consecutively for the past 27 years.
  • Charles Schwab is trading below its ten-year average price/book (P/BV) ratio.

Negatives;

  • Charles Schwab maintains a beta of 1.30, above the average company.
  • Charles Schwab’s dividend yield is below that of the S&P 500 Index.
  • Charles Schwab’s current dividend yield (0.76%) is below its five-year average historical dividend yield.

Latest Earnings & Analysis:

Charles Schwab issued its earnings data on January 18th. The company reported $0.36 earnings per share (EPS) for the quarter, meeting the consensus estimate of $0.36.

2016 2015 2014 2013 2012
Earnings per Share 1.28 1.03 0.95 0.78 0.69
Annual Dividend 0.27 0.24 0.24 0.24 0.24
Payout Ratio 21.09% 23.30% 25.26% 30.77% 34.78%

Net revenues $1.9 million for the brokerage firm versus $1.6 million the year before. Active brokerage accounts were 10.2 million versus 9.8 million the year before and total client assets came in at $2.7 trillion, up 11% overall. New accounts opened up in the quarter were up over 20% to just over 180,000.

Earnings per Share 2017 (projected) 1.55
Dividend 0.28
Dividend Payout Ratio 18.06%

The quarter numbers were solid as new account generation accelerated and assets climbed due to the stock market rally into year-end.  One item of note is that Charles Schwab cut its trading commissions for equities and ETFs to $6.95 last month. This was down from $8.95, placing the brokerage company below its major competitors like Fidelity, Etrade and TD Ameritrade. Then, Fidelity reduced its commission to $4.95 in late February. Thus Charles Schwab had to match.  Although TD Ameritrade followed with a reduction to $6.95, they are left behind in the war. Analysts put the pricing drop affecting revenue by about $15 million a month for Charles Schwab. However, unlike many of the other firms outside of Fidelity, a mere 11 percent of total revenue comes from trading each year. So this early pricing strike will affect competitors ability to gain clients as a pricing war benefits Schwab more than other firms.

The firm also slashed fees on its exchange traded funds (ETF). The brokerage company announced its lowering its cost to 0.03% for its Schwab S&P 500 Index Fund. It also lowered its Schwab Small-Cap Index Fund fee to a measly 0.06% per year and also its Schwab U.S. Aggregate Bond Index Fund to 0.04%. This is an attempt to match Vanguard and Blackrock, two of the largest low cost fund companies in the world. Other fund cost drops are in the works, further compressing margins in the industry. Obviously the company is confident that it can make up these fees with added volume along with higher interest rates.

Although the firm will take a hit from commission cuts, its ability to grow revenue through higher interest rates should cover this gap.  Low yields have had a dramatic effect not just on banks, but also brokerage firms that carry large amounts of cash in money market funds.  For the firm, one additional 0.25% raise in interest rates by the Federal Reserve could add almost $200 million to revenue to the bottom line. As the Federal Reserve has indicated that either two or three interest rate hikes are forthcoming this year, Charles Schwab could be one of the largest beneficiaries.

Thus the firm does have the potential to increase earnings and revenue by a substantial margin in 2017 and beyond. Although we think the firm is best in class and has a strong third-party advisor network, the firm pays a scant yield of under 1%. Its payout ratio has steadily dropped for the past five years.  In 2012, its yield was nearly 2% due to the fact that the stock price was at $12, versus $42 today.  We think that at 21 times 2017 earnings, the stock is also richly priced. There are much better values among financial firms including Invesco, Travelers, and KeyCorp.

Based on the firm’s low dividend yield, low payout ratio, high price/earnings, and high beta, Charles Schwab does not qualify as one of our Top 100 Dividend Stocks

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Charles Schwab Corp. Dividend Yield Historical Chart (Click to enlarge)

schw2

Chart Explanation:  Dividend growth stocks may be viewed undervalued when the current yield is above historical readings for the past 5 years.

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