Recently, the WSJ published a critical article on Charles Schwab as a company. We wanted to share our take on the news.
The article focuses on Charles Schwab's stock price (ticker: SCHW) decline over the past year. As a refresher, a stock price reflects the market's view of a business's value, as a share of stock is actual ownership in the underlying company. When future business projections change based on forecasts, earnings reports, news, etc., a stock price can go up or down.
Schwab recently had lower revenue (sales) and lower income (profits) than they did the two years prior. This doesn't mean it isn't a profitable company, it just caused the market's valuation of the company to decrease. In the most recent quarter, Schwab still earned $4.46 billion in revenue and had $1.045 billion in net income. That still represents a healthy business but represents a decrease from the recent market expectations.
Drivers of the Stock Price Change
Charles Schwab earns money in three primary ways: interest earned on cash holdings in accounts, asset management/advisory fees, and commissions. A few years ago when interest rates were near zero, most investors were fine with holding assets in a cash allocation that did not pay any interest. Over the last two years with an increase in interest rates, many investors have moved those funds to other similar stable assets like Money Market Funds which does not compensate Schwab as a business in the same way.
Another focus of the article was the effect of Schwab's recent acquisition of TD Ameritrade. Schwab acquired TD Ameritrade in 2020 and merged many of the systems in 2023 after years of work on the implementation. Company acquisitions are planned as smoothly as possible, but with the combination of such large firms, there are usually challenges. For example, the article cited things like branch closures and layoffs that have affected morale. At the same time, many of these changes are expected to yield long-term cost savings.
Should Investors Be Concerned?
Despite the headlines, we continue to be confident in the safety and security of using Charles Schwab as a custodian for our clients and as well as our personal accounts. Charles Schwab is still a robust company and serves as one of the primary custodians of investment assets in the United States.