Shares of Charles Schwab (SCHW, Financial) climbed 2.53% today after the company issued a business update, indicating that third-quarter results are on track. The update highlighted robust net new asset growth.
Schwab reported net new asset growth of $32.8 billion in August, an increase of $4.9 billion compared to August 2023. Additionally, the company noted expected attrition ahead of a major client conversion weekend in September, which is the largest of five such events this year.
Transactional sweep cash decreased from $371.8 billion in July to $366.8 billion in August, marking a significant improvement over the same period in 2023 and 2022. Schwab has faced challenges in a high-interest-rate environment as clients moved their sweep cash into higher-yielding financial instruments. As of June, bank deposits had fallen roughly 17.5% year over year.
Investor sentiment may also be buoyed by expectations that the Federal Reserve will cut interest rates by half a point at its meeting on Wednesday. A rate cut could alleviate Schwab's cash-sorting issues and help recoup billions in unrealized securities losses from previous investments in low-yielding, longer-term securities.
Currently, Charles Schwab (SCHW, Financial) is priced at $63.69 with a market cap of $116.51 billion and a P/E ratio of 26.43. The company has been tagged as "Modestly Undervalued" according to GuruFocus’s GF Value analysis, which estimates a GF Value of $72.64. This valuation suggests a potential upside, aligning with the current positive investor sentiment.
While Schwab displays poor financial strength, indicated by a high level of debt, it is valued close to its 2-year low PB ratio of 3.35. The Beneish M-Score implies that the company is unlikely to be manipulating its financials, providing an added layer of investor confidence. Additionally, insider buying over the past three months signals confidence from within the company.
In terms of growth, Schwab's revenue per share has been in decline over the past 12 months, and its revenue growth rate over the past five years stands at 8%. Despite these challenges, Schwab remains one of the largest firms in the investment business, managing over $8 trillion of client assets as of December 2023.
Moreover, Charles Schwab's dividend growth is noteworthy. It has demonstrated a 5-year dividend growth rate of 13.8% and a 10-year growth rate of 18%, presenting a steadily increasing return for income-focused investors.
For those considering the stock, it's important to weigh the promising asset growth and potential market recovery against financial challenges and market volatility. The Federal Reserve's decision on interest rates will likely play a pivotal role in Schwab’s near-term performance.
