Where does Schwab make his money now that he owns TD Ameritrade?
Some investors were understandably worried when in November 2019 – shortly before the COVID-19 pandemic took hold of the world – Charles Schwab (NYSE: SCHW) announced that it will acquire rival online broker TD Ameritrade. Rather than postpone or cancel this deal in the disruptive wake of the pandemic, Schwab moved forward, completing the acquisition in October last year as interest rates began to sink even deeper into a unexplored territory. Given how much Schwab’s business relies on these rates, no one really knew what to expect until last month’s first quarter budget report.
It turns out that the wacky stock trading environment of the past year as well as the negative impact of extremely low interest rates weren’t that great. Charles Schwab generates income in different ways, and all of these profit centers continue to function well.
A simple image tells the story of the company’s resilience.
Schwab, yesterday and today
You probably know him as an online brokerage company. Indeed, you might even be a customer. What you may not know is that prior to the acquisition of TD Ameritrade in October, Charles Schwab had not generated any trading commission income since the end of 2019, when he stopped charging. to facilitate these transactions.
Don’t worry, though – the company’s fine. Even when she billed trades, commissions were never a key part of her business, accounting for less than 10% of full year 2018 revenue. Plus, even with TD Ameritrade commissions returning in the mix, it’s not a profit center that changes the game.
So where Is Schwab is making his money? As has always been the case, fees and loans.
The graph below puts it in perspective. Of last quarter’s $ 4.7 billion in revenue, $ 1.9 billion came from interest rate sources such as margin loans and money market funds despite the difficult environment; As is the case with banks, Schwab sees higher margins on these services and products when interest rates are higher than lower.
But even when rates are as low as they are now, there is still money to be made. Recurring asset management fees passed on by mutual fund companies as well as pension administration fees generated just over $ 1 billion in revenue. Bank deposit income (TD Ameritrade is also a bank) increased by an additional $ 351 million, compared to nothing a year ago when TD was not part of the Schwab family.
Yes, trading revenue was an impressive $ 1.2 billion in revenue for the three-month period ending in March. But this is an exception to the norm. A furious market has pushed investors away from the sidelines in ways that are not only unusual, but unlikely to be sustainable. TD Ameritrade’s pre-purchase commission income for the same quarter a year earlier was a smaller $ 481 million – a number that more accurately reflects the type of trading income it will continually bring to the table.
Still, it’s good to know that the company is positioned to occasionally reap a windfall when market interest is piqued.
While shareholders may superficially wish trading commissions to remain this robust forever, this is not an ideal aspiration.
You see, net interest income and fee-based income is much more consistent and less difficult to induce than commission income. They are also not seriously threatened by market corrections or even bear markets in their own right.
Frequent trading is also a double-edged sword for brokerage firms, for the same reason it is for investors. In other words, the more often an investor trades, the more likely it is that the investor will reduce the value of an account with unwanted movements. For the same reason, most investors are better served by simply staying in mutual funds and holding stocks for the long term, just like brokers.
Better yet, a more consistent flow of recurring fee income also allows for more reliable funding of dividend payments. To that end, Schwab has made quarterly dividend payments for years and has also reinforced them on a fairly regular basis.
The bottom line? Charles Schwab is a more cohesive team than most investors realize. Its premium mix is always loaded with recurring fees and interest income, which don’t change too drastically from quarter to quarter.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.