3 Things You Need to Know If You Buy Charles Schwab Today

Founded in 1971, Charles Schwab (SCHW 1.76%) has a long history in the financial services sector. And now it has become a well-known institution in the industry, catering to tens of millions of customers.

But this financial stock hasn’t been too kind to its shareholders. As of this writing, the stock is 34% below its peak price. And while the S&P 500 has so far posted a double-digit gain in 2023, Charles Schwab is down 25% this year.

Such a beaten-down company might be drawing the attention of investors who are hoping for a recovery. Before you buy shares, though, here are three things you need to know about Charles Schwab.

Business overview

Most investors are familiar with Charles Schwab because of its brokerage business, which allows both individuals and institutions to trade various financial products. Of course, these activities are still a key revenue source. Of the $4.6 billion in total sales in the most recent quarter (Q3 2023 ended Sept. 30), 43% was derived from a combination of asset management and administration fees and trading revenue.

But you might be less familiar with the fact that Charles Schwab also operates similarly to a traditional bank. The business offers checking and savings accounts, credit cards, and home loans as well.

Investors might have been used to this company posting consistently strong growth, but things have taken a turn for the worse. In the latest quarter, Charles Schwab’s revenue declined 16% year over year as net interest revenue took a major hit.

Macro impacts

As is the case with any financial institution, Charles Schwab is always going to be affected by whatever is happening in the macro picture, particularly interest rates. Net interest revenue fell 24% compared to the same quarter last year because clients were moving money to higher-yielding accounts. This scenario costs the company more.

Things could be bottoming, though. “Cash realignment activity decelerated advance during the quarter — even with the brief uptick in August and an enhance in long-term interest rates,” CFO Peter Crawford said.

On the other hand, a rising stock market this year has been a boon for the business. Unsurprisingly, more funds have been flowing to Schwab’s various investment products, and this resulted in asset management and administration fees increasing by 17%.

Investors might have forgotten that Charles Schwab was impacted as well during the regional banking fiasco that happened earlier this year. Some prominent banks quickly became insolvent as they were sitting on bonds whose values dropped significantly due to rising interest rates.

Indeed, Schwab’s bank deposits (as of Sept. 30) of $291 billion were down from $375 billion at the end of last year. This is a sign that customer confidence took a hit.

Investors who are eyeing the stock need to comprehend how changes happening with the economy will alter the company’s prospects. This is especially pertinent today, when macroeconomic uncertainty is high.

Economic moat

It’s difficult to see a business of this size not having an economic moat protecting its competitive position. In Charles Schwab’s case, it benefits from its massive scale. This allows the company to better spread its fixed costs over more assets and clients.

An argument can also be made that this business possesses one of the strongest brands in the financial services sector, thanks largely to its long track record in the industry. This can boost customer loyalty, while giving them the trust that they need when looking for where to park their hard-earned savings.

I believe the company also benefits from switching costs. Moving from one financial provider to another can be a burdensome process that could hinder clients from leaving. This means a more sticky customer base.

By understanding these three factors about Charles Schwab, investors are now better informed to make a decision about the stock.