TD Ameritrade and Brokers’ Valuations Rose on Increased Trades
TD Ameritrade Expands Client Assets and Trades in Fiscal 2Q16
Slow recovery
TD Ameritrade’s (AMTD) stock has declined 15% over the past one year. The company has registered strong growth in client assets, trades, and commissions during fiscal 2Q16. However, the trades were driven by increased volatility and not strength in the markets. Over the long run, brokers have benefited from the growing economy and equities as assets appreciated and trading activity expanded. The current recovery of the US and global equities has been weak and markets are expecting a pullback in commodities after the recent spike, which is expected to impact commodity-driven nations and asset classes.
TD Ameritrade’s first quarter net income rose by $16 million to $205 million as compared to the prior year’s quarter. The company rewards its shareholders through dividend and share repurchases. For 2Q16, TD Ameritrade declared a dividend of $0.17 per share, a rise of 13% compared to the prior year’s quarter.
TD Ameritrade’s peers in the brokerage industry have the following dividend yields:
Interactive Brokers Group (IBKR): 1.1%
E*TRADE (ETFC): 0%
Charles Schwab (SCHW): 0.74%
Together, these companies form 1.3% of the Financial Select Sector SPDR Fund (XLF).
In the second quarter of 2016, TD Ameritrade repurchased 8 million shares of its common stock for $231 million.
Valuations
Currently, TD Ameritrade is trading at 18.5x on a one-year forward earnings basis. Its peers are trading at 20.3x. Historically, the company has traded at a discount to its peers because of average operating margins. Overall, the sector’s valuations have risen recently on increased volatility led by equities.
On a trailing-12-month basis, TD Ameritrade is valued at a price-to-earnings ratio of 21x compared to the industry average of 34x.
The trading activity in the US market is expected to be subdued in the near future as concerns over infinite quantitative easing and slowing growth mount. The contraction of yields is having a negative impact on TD Ameritrade’s earnings. The rise in interest rates is expected to be lower and slower due to a weak macro environment. Brokers might have to focus on expanding client assets to boost their returns. For 2016, TD Ameritrade expects to post $1.75 in earnings per share backed by net new assets of $73 billion, up 11% on a year-over-year basis.
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