Charles Schwab: Steady Performance, But Is There More to Come?

• Charles Schwab had a solid quarter and issued strong guidance, but its share price upside is limited.
• Analysts’ response to the news is mixed, showing an increased conviction the stock is already fairly priced.
• Institutions have been a headwind this year and may sell into the rally, capping gains in 2024.

Charles Schwab (NYSE:) had a solid quarter, outpacing expectations and issuing favorable guidance. Still, its stock price may only increase slightly because of the analyst and sell-side activity this year.

The analysts’ response to the Q3 results is tepid. The number of lowered price targets outpaces the increased targets by a wide margin, narrowing to a tighter range around the consensus. The number of analysts and tightening range show an increasing conviction in the consensus estimate, which assumes the stock is fairly valued near current levels. With this in play, Charles Schwab’s upside potential is limited, and the institutions are also a headwind.

Institutional activity has been a headwind for Charles Schwab stock all year. The balance of trailing 12-month activity is bullish due to a surge of buying late in 2023 and Q1 this year, but the activity in 2024 is not. Institutions, which own a significant 85% of the shares, sold on balance in Q2, Q3, and the first weeks of Q4. That trend may change now that Q3 results are in, but a significant tailwind is not expected to form.

Charles Schwab Grows Revenue, Reduces Debt

Charles Schwab had a decent quarter, with client growth and dollar flows contributing to a 5% increase in revenue. Core net new assets are up 10%, while cash flow into managed solutions reached 60% on a year-to-date (YTD) basis.

Regarding fees, trading fees increased by 4%, while asset management fees grew by 21% to set a new company record. Among the details that grabbed the market’s attention were the margin and earnings, with total expenses falling 6.5% and driving leverage gains on the bottom line. The adjusted earnings are up 27% on a year-over-year (YoY) basis, and additional improvement in operational quality is expected in Q4.

Another detail that grabbed the market’s attention was debt reduction. The company reduced its bank supplemental funding by nearly $9 billion, or more than 10%, but the improvement could be fleeting. The decline is due to increased balance sheet cash related to client sweep balances, not to increased company funds. The result is reduced costs, but with the expectation that clients will invest their funds and reverse the improvement sooner or later.

Schwab’s Dividend Is Safe and Reliable, and It Might Even Grow

All else aside, Charles Schwab’s balance is in fine condition, with capital ratios above target and improving along with client growth. The takeaway is that the $1.00 annual dividend distribution is safe and reliable, with a payout ratio near 40%, and it might grow. The company doesn’t make regular annual increases but tends to increase the payout every few years and is on track to produce another soon.

The caveat is the yield. The 1.47% dividend yield is only marginally better than the average dividend and comes with more risk. The stock has a 1.17x 24-month beta, which shows a higher risk of volatility and potential for deeper-than-average movement when the broad market declines. JPMorgan Chase (NYSE:), which also has a robust trading and wealth management business, trades at nearly half the valuation and pays 2.25% in yield. It has a 24-month beta of less than 1x.

Charles Schwab Stock at a Critical Turning Point

Charles Schwab stock is at a critical turning point, testing resistance at the top of a price gap that formed over the summer. The critical level is near $72.50 and capping gains following the release. If the market can move above it, it could continue to advance, but there is potential for significant resistance at $76 and $78.

If the market for SCHW confirms resistance at $72.50, the odds are high that it will retest for support at the low end of the recent range or lower, which is near $62.50.

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