When a sell-off becomes irrational, you don’t have to panic. Instead, you can view it as an opportunity. Take Charles Schwab (NYSE:SCHW) stock as an example; it’s falling fast, but the company isn’t in major trouble. So, I am bullish on SCHW stock as there’s a terrific value here, but that window could close soon.
Pick the best stocks and maximize your portfolio:
- Discover top-rated stocks from highly ranked analysts with Analyst Top Stocks!
- Easily identify outperforming stocks and invest smarter with Top Smart Score Stocks
Charles Schwab is a well-known and broadly trusted financial institution. The company offers banking, lending, and brokerage services. It’s not a particularly disruptive company, and Schwab generally appeals to customers seeking traditional personal finance services from a bank that’s been around for a long time.
Furthermore, Fortune magazine has recognized Charles Schwab as one of its 50 World’s Most Admired Companies for six years in a row. This isn’t a speculative little bank that’s likely to go out of business tomorrow or next week. Hence, if short-term traders choose to sell their SCHW shares, value seekers can consider picking up those same shares at a delightful discount.
Charles Schwab Checks the Right Boxes
There are a number of reasons why Charles Schwab should appeal to investors right now. For one thing, income-focused folks should be glad to know that, earlier this year, Schwab declared a 14% increase in its quarterly dividend payments. This is certainly a positive sign; to quote Charles Schwab himself, “This dividend increase reflects the Board’s confidence in our ability to continue to grow earnings and cash flow.”
The company has been a dividend grower for at least 14 years and features a trailing dividend yield of 1.45% (and a 1.6% forward dividend yield).
Still, cautious investors might wonder whether Schwab’s dividends are sustainable. The answer is definitely yes, for a number of reasons. First of all, Charles Schwab’s dividend payout ratio is 22.7%, which isn’t excessive at all (for me, the alarm bells go off when the payout ratio starts to approach 50%). Second, Schwab has had positive earnings for a long time and hasn’t had any ultra-wide EPS misses in recent memory.
Indeed, Charles Schwab’s earnings seem intact despite the negative pressures of high inflation and interest-rate hikes. For instance, in the fourth quarter of 2022, Schwab’s net income increased 25% year-over-year. In addition, the company’s full-year 2022 net income grew 23% year-over-year. In other words, it certainly looks like Charles Schwab beat the odds and stayed financially firm during a tough time for the U.S. financial sector.
Here’s Why SCHW Stock Fell, but You Shouldn’t Panic
So, why did SCHW stock tumble yesterday and then again today? It’s important to investigate the cause of the share-price drop in order to determine whether Charles Schwab stock is toxic or a prime bargain.
There really isn’t anything terrible happening with the company at the moment. A Finra arbitration panel required Schwab to pay a $144,000 penalty for alleged “flawed investment recommendations,” but that’s a minuscule amount of money for a large banking institution.
However, here’s the real reason SCHW stock, and banking stocks, in general, have fallen over the past couple of days. The culprit is SVB Financial Group (NASDAQ:SIVB), a financial institution that’s more commonly known as Silicon Valley Bank (SVB). Check the chart, and you’ll see the horror show that’s happening now with SIVB stock.
This is what can happen when a bank over-leverages itself on a particular asset class. SVB is heavily allocated in bonds, and as you may be aware, bond yields are up because of the Federal Reserve’s aggressive interest rate hikes. This means that bond prices are down, and that’s problematic for a bond-heavy investor like SVB.
This doesn’t mean that a bigger, better-capitalized, and more sensibly-diversified bank like Charles Schwab is in trouble. Analysts with Morgan Stanley (NYSE:MS) assured, “We want to be very clear here… we do not believe there is a liquidity crunch facing the banking industry, and most banks in our coverage have ample access to liquidity.”
In other words, respectable banks like Schwab aren’t over-leveraged like SVB and are better protected against large moves in bond yields.
Is SCHW Stock a Buy, According to Analysts?
Turning to Wall Street, SCHW is a Moderate Buy based on 11 Buys, three Holds, and one Sell rating. The average Charles Schwab stock price target is $91.58, implying 49.6% upside potential.
Conclusion: Should You Consider Charles Schwab Stock?
At some point, investors should come back to their senses and realize that Charles Schwab doesn’t belong in the same category as SVB. If SCHW stock is down, it’s really just collateral damage and probably won’t lead to a sustained drawdown.
Consequently, investors have access today to a stock representing a solid financial business that’s earnings-positive, a reliable dividend payer, and not over-leveraged. It makes perfect sense, then, to strongly consider a long position in SCHW stock.
