Marko Veckov

 Essay Student’s Name Institutional Affiliation Abstract This paper’s aim is to show main differences in performances between to brokerage services company from US, Charles Schwab and TD Ameritrade. Both companies are mainly serving the US markets and provide investment advisory with a wide variety of financial instruments to their clients. Each company has significant assets, with Charles Schwab being 14th largest banking institution in the United States, while TD Ameritrade has 1.2 trillion US $ of clients’ assets and 12 million user accounts. The paper argues that main differences between them lay in their stock structure, dividend payment history, capital structure, parameters of their financial health, their beta and risk parameters. Two companies do share similarities, in terms of their risk handling for their clients and their beta coefficient, which is the same for each of them in the past 5 years. Finally, their advisory role to their clients is of a similar notion of diversification of their investments. ESSAY Charles Schwab & Co, Inc. and TD Ameritrade are two large brokerage services companies, both based in United States and serving mostly US market. In this paper, we will give comparisons between two companies on some major parameters of their business conduct in recent years. Mutual companies’ competition grew even larger with the announcement of acquisition of 26 billion $ worth shareholder package of Ameritrade by Charles Schwab in 2019. We debate that companies’ differences in recent years, can be traced in stock structure, capital structure, dividend payment history, key financial ratios, beta and risk parameters. Overview of the companies Charles Schwab & Co. is one of the largest financial institutions in US, founded in 1971, and with headquarters in San Francisco, California. It provides financial brokerage services and is the 14th largest banking institution in United States with over 3.3 trillion US $ in client’s assets. The company specializes in buying and selling securities such as stocks, bonds, and mutual funds [ CITATION Blo20 \l 1033 ]. It mainly serves clients, which are based in the United States. TD Ameritrade is a brokerage company that offers electronic trading platforms, founded in 1975, with its headquarters in Omaha Nebraska. The company offers custody, investment management, and financial planning services [ CITATION Blo201 \l 1033 ]. It also, just like Charles Schwab & Co. mainly serves clients in United States, with its client assets of 1.2 trillion US $ as of March 2020 and more than 12 million of clients’ accounts opened. Stock structure In the quarter that ended with June 2019, institutional investors bought 15.4 million US $ net worth of shares of Charles Schwab, and their ownership in the company is now 87.51 % of total shares. This majority interest is a greater percentage than is typical for companies in the Investment Banks/Brokers industry and highlights that the smart money sees this stock as an important holding [ CITATION CNN20 \l 1033 ]. Following chart gives an insight into ownership structure of the company: Also, following table gives us insight into latest Charles Schwab’s stocks purchasing activity by other companies: Date Name of the company Activity description 6/30/2020 Wellington Management Co. LLP Bought 12.6 million shares of Charles Schwab 6/30/2020 NINETY-ONE UK. LTD Bought 10.5 million shares of Charles Schwab 6/30/2020 T. Rowe Price Associates, Inc. Bought 3.8 million shares of Charles Schwab As for TD Ameritrade, in the quarter which ended in June 2019, institutional investors bought 6.8 million US $ net worth of shares of the company, which increased their ownership percentage up to 87.41 %. Following chart gives us an insight into ownership structure of the company: Also, in the following table, latest purchasing activity of company’s stocks is given: Date Name of the Company Activity Description 6/30/2020 Tudor Investment Corp. Bought 2.3 million shares of TD Ameritrade 6/30/2020 Morgan Stanley & Co. LLC Bought 1.9 million shares of TD Ameritrade 6/30/2020 BOFA Securities, Inc. Bought 1.8 million shares of TD Ameritrade Capital structure In the following table, capital structure of Charles Schwab will be given: Total Debt to Total Equity 42.63 Total Debt to Total Capital 27.09 Total Debt to Total Assets 2.75 Long-Term Debt to Equity 38.27 Long-Term Debt to Total Capital 24.32 Total debt to total equity or D/E shows us company’s financial leverage and is computed when total liabilities are divided by shareholders’ equity. Optimal level of this parameter should not be above 2, meaning that in this case company borrows two times more money than it owns. In the case of Charles Schwab, this ratio is low, meaning there is lower risk of loan default for borrowers and lower risk of bankruptcy for shareholders in case of economic difficulties. Debt to capital ratio or D/C we calculate when we divide total debt (long + short-term debt) with total capital, which is interest carrying debt + shareholders’ equity. Generally, the higher the ratio is, the riskier the company is. In this case, this ratio is low, meaning that significant amount of company’s operations is financed through equity capital. Debt-to-assets ratio measures in which portion company’s assets are financed by debt. Ratio lower than 0.4 or 40% is thought to be a good ratio for any company. In this case, as this ratio is higher than 1, company’s debt is higher than its assets. This may show a risk of company’s borrowing activity, especially if interest rates go up. This ratio is calculated when long-term debt, the one who must be paid of in more than a year period, is divided by total amount of common and preferred stocks. High ratio indicates higher risk for the company, as it must meet higher obligations of principal and interest on its loans. As in this example, ratio is below 0.5 or 50%, company is no risky position. This ratio is a measure of financial leverage of a company and is calculated by dividing long-term debt with total capital (long-term debt + book value of common stocks + book value of preferred stocks). The higher it is, the riskier the position of the company is, as it finances mostly from debt and this can lead into bankruptcy. Its lower value, like in the case of Charles Schwab, means that there is an increase in shareholders’ equity. Following table gives us insight into capital structure of TD Ameritrade: Total Debt to Total Equity 41.31 Total Debt to Total Capital 29.23 Total Debt to Total Assets 8.19 Long-Term Debt to Equity 35.09 Long-Term Debt to Total Capital 24.83 TD Ameritrade has high total debt to assets ratio, which means that majority of company’s assets are financed by debt. This means that company has more liabilities than assets and that it can be placed in difficult financial situation if interests suddenly start to rise. Leverage is also sometimes an important tool for companies to grow, as they find sustainable purposes for borrowed loans. Dividend payout history In the following table we will show dividend payments for Charles Schwab for the year 2020: Declared Date Record Date Payable Date Amount Type 07/23/2020 08/17/2020 09/01/2020 $ 1806,60 Preferred Stock, Series G 07/23/2020 08/17/2020 09/01/2020 $ 2312,50 Preferred Stock, Series E 07/23/2020 08/17/2020 09/01/2020 $ 14.88 Preferred Stock, Series D 07/23/2020 08/17/2020 09/01/2020 $ 15.00 Preferred Stock, Series C 07/23/2020 07/17/2020 08/28/2020 $ 0.18 Regular Cash 05/12/2020 05/15/2020 08/03/2020 $ 35.00 Preferred Stock, Series A Company usually pays dividends four times a year regularly and it is noticed that in the year 2020, they were significantly higher comparing to the dividends paid in the same period the year before. For instance, on 11th July 2019 company declared dividends that will be paid in November below 1 $, with yields of 1.9%. Following the company’s regular payout history, the dividends were this low since at least 2011. The following table shows dividend payout history for TD Ameritrade: Pay Date Declared Date Ex-Dividend Date Amount Payout Type 08/21/2020 07/21/2020 08/06/2020 $ 0.3 Regular 05/20/2020 04/22/2020 05/05/2020 $ 0.3 Regular 02/19/2020 01/22/2020 02/04/2020 $ 0.3 Regular 11/19/2019 10/21/2019 11/04/2020 $ 0.3 Regular 08/20/2019 07/22/2019 08/05/2020 $ 0.3 Regular 05/21/2019 04/23/2019 05/06/2020 $ 0.3 Regular This low dividend amount mean that large percentage of dividends are reinvested into common shares of the company. Shareholders aren’t charged any fees or commissions for this reinvesting activity. Also, they are permitted to leave this option at any time. Financial ratios In the following table, financial ratios for Charles Schwab are presented: P/E Current 13.02 P/E (with extraordinary items) 14.56 P/E ratio (without extraordinary items) 17.80 Price to Sales Ratio 5.33 Price to Book Ratio 3.23 Price to Cash Flow Ratio 6.09 P/E ratio is calculated when price of share is divided by earnings-per-share and it ranged historically between 13 and 15. A high P/E ratio could mean that a company's stock is over-valued, or else that investors are expecting high growth rates in the future [ CITATION Hay20 \l 1033 ]. In our example, this ratio for Charles Schwab is within historical boarders. This ratio can also be calculated with or without so-called extraordinary items, or unusual gains or loses that are infrequent in nature and that occur only once and won’t be repeated in the future. When using this parameter to compare stock value between companies, caution require to pay attention on cash holdings and debt. Price to sales ration divides company’s stock price with its revenues. It is considered good, when its value is between 1 and 2, while below 1 is considered as excellent and any value above 4 is considered unwanted. As in this case, this number is above 5, that may indicate that the company’s stocks are overvalued. Similarly, price to book ratio uses book value of company’s shares, that is calculated as total assets minus liabilities. Low ratio values, below 1 or sometimes below 3, are good determinant of undervalued stocks and are useful for its analysis. Since the value here is above 3, stock is possibly overvalued, but for clear pictures ROE ratio must be also calculated. Price to cash flow ratio measures the value of the stock in comparison to its operating cash flow. Value below 15 or 20 is in most cases considered as good sign for stock evaluation, that may suggest it is undervalued. In our case, it is well below 15 or 20 and we can conclude that based on this ratio, stock is undervalued. Following table shows the same ratios for TD Ameritrade company: P/E Current 9.5 P/E (with extraordinary items) 10.51 P/E (without extraordinary items) 11.78 Price to Sales Ratio 4.33 Price to Book Ratio 2.92 Price to Cash Flow Ratio 3.25 Low P/E ratio in all three cases might indicate that this stock is underpriced in short term and is generally cheaper than Charles Schwab’s stock. However, based on price to sales ratio stock might be overvalued in short turn, as it estimates this value for the past 12 months of company’s sales. Price to book ratio, like P/E ratio shows that this stock is undervalued, as it is below 3, just like price to cash flow which is well below 15. Beta This value for both companies for a prior five-year period is 1.17. It is a ratio that measures the risk of volatility of a company’s share price in comparison to the market as a whole[ CITATION Fin20 \l 1033 ]. Value of beta higher than 1, means that company’s stock value is more volatile than the market. Risk At Charles Schwab, they advise their client’s not to have more than 20% of their equity account tied to one stock, especially if it’s employer’s. One way to manage risk associated with stock options is by adopting an accelerated exercise-and-sell strategy, which allow you to invest the money in other assets [ CITATION Cha20 \l 1033 ]. Similar idea is shared with their counterparts at TD Ameritrade. They often advice clients to have mixed portfolio, which determines its volatility in a longer period but it’s a good strategy based on diversification. References Bloomberg. (n.d.). Charles Schwab & Co. Inc. Retrieved September 26, 2020, from Bloomberg Web Site: https://www.bloomberg.com/profile/company/15837Z:US Bloomberg. (n.d.). TD Ameritrade Inc. Retrieved September 26, 2020, from Bloomberg Web Site: https://www.bloomberg.com/profile/company/-Z:US Charles Schwab. (n.d.). Managing Risk. Retrieved September 27, 2020, from Charles Schwab Web Site: https://www.schwab.com/public/eac/resources/articles/managing_risk.html CNN. (n.d.). Charles Schwab Corp. Retrieved September 26, 2020, from CNN Business Web Site: https://money.cnn.com/quote/shareholders/shareholders.html?symb=SCHW&subView=institutional Finbox. (n.d.). Beta (5 Year) for the Charles Schwab Corporation. Retrieved September 26, 2020, from Finbox Web Site: https://finbox.com/NYSE:SCHW/explorer/beta Hayes, A. (2020). Price-to-Earnings Ratio-P/E Ratio. Retrieved September 26, 2020, from Investopedia: https://www.investopedia.com/terms/p/price-earningsratio.asp#:~:text=The%20price%2Dto%2Dearnings%20ratio,multiple%20or%20the%20earnings%20multiple.