The market's disappointment around the Q2 earnings results from Charles Schwab (SCHW), the leading brokerage and banking company, triggered heavy downside in the company's stock. SCHW plummeted more than 10% on July 16 after earnings, and ultimately ended last week down 17%, as a glut of low-yielding assets on its balance sheet weighed on results.
However, insiders at Schwab took advantage of this slide in the share price, and loosened their purse strings to up their stakes in the company.
With well-placed insiders loading up on stock at the same time the brokerage faces genuine fundamental concerns - including a miss on new account openings - is Schwab a stock to buy on the dip, or a value trap to skip? Let's have a closer look.
About Charles Schwab Stock
Founded in 1971, Texas-based Charles Schwab (SCHW) is one of the leading financial institutions in the world. The company provides a full range of services, including brokerage, banking, wealth management, and financial advisory services. The company currently commands an impressive market cap of $113.8 billion.
SCHW stock is down 3.5% on a YTD basis, and offers a dividend yield of 1.56%. Although the dividend yield is lower than the financial sector median, its conservative payout ratio of 30.5% suggests that Schwab has room to raise its dividend going forward.
Buy-the-Dip Duo Strikes Again
As for the insider buying on Schwab, the post-earnings purchases last week are worth watching for a few key reasons.
Both Co-Chair/CEO Walter Bettinger II and President Richard Wurster picked up shares one day after the Q2 report sent shares reeling, with the CEO's purchase topping seven figures - making these some very noteworthy buys.
Bettinger parted with more than $1.6 million to buy 25,000 SCHW shares at an average price of $66.26 each, bringing the CEO's stake to 0.0473%. The executive holds 840,101 shares now.
On the same day, Wurster purchased 10,000 shares of Schwab at an average price of $62.0454 per share, for a total outlay of over $620,000.
The last insider buying on Schwab took place in August 2023, and the last insider buying by the duo of Wurster and Bettinger happened in March 2023.
Specifically, both men bought shares on March 14, 2023 in the $57-$59 range. Then - amid rippling Silicon Valley Bank contagion fears that sent the stock sharply lower - Wurster went back to the well solo a few days later to buy the dip in SCHW on March 17, 2023, with the stock trading down at $54.38.
In other words, since the last time Wurster bought this kind of dip in his own stock, SCHW has gained roughly 22%.
SCHW Selling Seems Overdone
The steep sell-off in Schwab stock following the Q2 results seems overblown; while the company's results for the quarter were mixed, they weren't nearly all that bleak.
Q2 EPS of $0.73 came in above the consensus estimate of $0.72, even as they declined by 2.7% yearly. Notably, Schwab's EPS has surpassed expectations in each of the past five quarters.
Net revenues ticked up by 1% from the previous year to $4.69 billion. Although net interest revenues fell by 5.8% from the prior year to $2.2 billion, the firm's 18% growth in asset management and administration fee revenues to $1.4 billion offset the decline.
Over the past 10 years, Schwab's revenues and EPS have expanded at CAGRs of 12.37% and 14.47%, respectively.
Despite new account concerns, active brokerage accounts increased 4% year-over-year to 35.6 million, with clients' daily average trades rising to 5,486 in Q2 from 5,272 in the year-ago period. Further, core net new assets jumped by 17% on a YoY basis to $61.2 billion.
And while the average bank deposit balance fell 17.4% from the previous year to $258.12 billion, there was an improvement in the average yield on these deposits to 1.31% from 1.11% in the year-ago period.
The company closed the quarter with a cash balance of $25.4 billion, higher than its long-term debt levels of $22.4 billion.
What Do Analysts Say About Schwab Stock?
Schwab insiders aren't the only ones who consider the stock a buy. Analysts have a consensus rating of “Moderate Buy,” with a mean target price of $75.72. This indicates an expected upside potential of about 14.3% from current levels.
Out of 19 analysts covering the stock, 10 have a “Strong Buy” rating, 2 have a “Moderate Buy” rating, 5 have a “Hold” rating, 1 has a “Moderate Sell” rating and 1 has a “Strong Sell” rating.
