In 2024, Charles Schwab's share performance fell short of expectations.
Charles Schwab (NYSE: SCHW) has had a mixed performance this year, climbing approximately 11% year-to-date, while the S&P 500 has soared over 25% during the same period. The competition isn't faring too badly either, with Morgan Stanley seeing gains of around 35% due to its ownership of E-trade. Let's dive into the factors influencing Schwab's performance and future prospects. Meanwhile, check out BP Stock Drops 14% This Year, What's Coming Up?
Recent developments have made Schwab's banking sector a drag. While the business flourished during the era of low-interest rates, the Federal Reserve's tightening since 2022 has led customers to shift their deposits toward higher-yielding investments. This trend, known as cash sorting, has been causing Schwab the most trouble. In contrast to traditional banks, which usually lend these funds to retail and commercial customers through loans, Schwab invests a large portion of its cash in long-term assets such as Treasuries and mortgage-backed securities. The increased interest rates have eroded the value of these assets, resulting in shrinking net interest margins and profitability for Schwab.
Surprisingly, Schwab's asset management division has been performing well. During Q3 2024, the company's revenues increased by 5% year-over-year to $4.85 billion, primarily driven by its asset management business. Schwab's total client assets reached $9.92 trillion during the last quarter due to higher market valuations and ongoing asset inflows. Furthermore, the integration of its TD Ameritrade acquisition, which was completed in 2020, has also contributed to the growth of its asset management business. Asset management and administration fees, derived from managing mutual funds and ETFs, have been growing steadily by around 21%.
The growth in SCHW stock over the past 4 years has been anything but steady, with annual returns displaying significant volatility compared to the S&P 500. In 2021, returns amounted to 60%, while there was no change in 2022, and losses were incurred in 2023, at -16%. Interestingly, the Trefis High-Quality Portfolio, comprising 30 stocks, has showed less volatility and outperformed the S&P 500 each year during the same period. Why is that? This portfolio offered better returns with reduced risk compared to the benchmark index, providing a smoother ride as evidenced by its performance metrics. So, is SCHW stock a worthwhile investment at its current price?
We maintain a neutral stance on SCHW stock. Our evaluations suggest that Schwab's valuation stands at around $78 per share, which is approximately 4% higher than its current market value of around $75. As the company's asset management-focused business continues to benefit from increased investor engagement and a flourishing stock market following the U.S. election, the Fed's indications of fewer rate cuts for the coming year could potentially pose a challenge for the stock.
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The Trefis 'High-Quality Portfolio', which includes Charles Schwab (SCHW), has shown less volatility and outperformed the S&P 500 each year for the past 4 years, providing better returns with reduced risk.Despite Schwab's asset management division showing strong growth in revenues and client assets, the Federal Reserve's tightening since 2022 and increased interest rates have negatively impacted Schwab's net interest margins, causing trouble for the company.
