Should You Buy Charles Schwab And Its 1.3% Dividend?
With new cases of the coronavirus spiking in the US and worldwide.
With the already historic unemployment levels and job losses in recent months.
And with many Blue-Chip stocks looking vulnerable when they’re supposed to be among the best areas to invest your capital.
There are few safe places to invest today. And this number grows smaller every day this crisis lasts.
The key to continue compounding your investments and build wealth is to keep investing well over time.
Most people think the number one way to do that is to invest in assets that will grow your capital.
And this is a huge part of things.
But another huge part of this is also losing as little capital as possible.
The fewer investment losses you have the more capital you keep. And the more capital you keep the faster you can invest well to grow your wealth.
In recent articles I’ve shown you several stocks to avoid investing in.
- Buy Procter & Gamble… But Only When This Happens
- Why To Avoid Delta Airlines…Even Though Its Undervalued
- Avoid Aurora Cannabis Stock As Marijuana Legalization Approaches…
- Are Verizon’s Huge Profits and 4.4% Dividend A Buy?
- Does Netflix’s Big Earnings Make It A Buy?
To help you figure this out, today I want to answer – Should You Buy Charles Schwab And Its 1.3% Dividend?
Charles Schwab (SCHW) is one of the United States largest asset managers and investment brokerage firms with more than $5.5 trillion in assets under management.
Its based in San Francisco California. It has a $103.4 billion market cap. And it pays a 1.3% dividend… Which is reason #1 to consider buying its stock.
Charles Schwab’s 1.3% Dividend
Over the last decade Schwab’s paid out a total of $3.17 per share in dividends.
At today’s count of 1.294 billion shares that’s equal to $4.1 billion paid out to shareholders in that time.
Plus, it raised its dividend 196% in the last decade from $0.24 per share in 2010 to $0.71 per share now in 2021.
These dividend payments help you earn cash if you take the money out. Or allow you to buy more shares over time if you reinvest the dividends.
It can do this because it earns huge profits. Which is reason #2 to buy Schwab to Depression Proof Your Portfolio.
Schwab Earns Huge
In almost all these articles I talk to you about operating profits here… But asset managers are different.
For most companies operating profit and free cash flow are 2 of the most important profit metrics to look at because this is the “true” profit a company earns from its operations.
They’re the true profits of a company because they’re unaffected and unmanipulated by things like taxes, lawyers, “adjustments”, and accountants as much as net income is.
Operating profit and free cash flow show you how profitable a company is… And they also give you clues to see if a company has ultra important competitive advantages too.
Asset managers like Schwab are different though.
Operating profit is usually unreadable from asset managers because of the business model for them.
So, the only metric in terms of profits to pay attention too for asset managers is free cash flow production.
I look at this with the free cash flow to sales ratio (FCF/Sales) I normally use. Over the last decade its 38% per year on average.
I call this the “Cash Machine” metric.
Its FCF/Sales margin is gigantic due in large part to the business model of asset managers.
Running a large investment firm is relatively low cost. And this means higher cash flows industry wide.
Even better is that cash flows increase exponentially as asset managers bring on more assets under management because costs don’t rise at the same rate as you bring on assets.
Because it generally takes the same amount – or a slightly higher amount – of people to run a fund with say $100 million as it does to run a firm with $1 billion.
These large profits in the industry – and for Schwab who we’re talking about today – gives it a huge margin of safety.
But these large profits also allow Schwab to have ultra low debt levels… Which adds even more.
Schwab Has Ultra Low Debt
Another wonderful thing about asset managers… They generally also have super low debt because of their low cost and high profit operations.
It has $27.5 billion in cash compared to $7.8 billion in debt.
Its debt-to-equity ratio is 0.30.
And debt only makes up only 7.5% of its market cap.
These are all well below the thresholds I look for. And this gives Schwab a gigantic margin of safety. Especially when combined with its huge profits and low costs.
But what about its valuation? Is it cheap enough to buy?
Schwab IS Not Cheap Enough To Buy
With the markets at or near all-time highs you’d expect a great stock like Schwab to be selling at an enormous valuation.
Its not… But its still not cheap enough to buy either.
As of this writing its P/E is 26.5.
Its P/CF is 17.2.
Its forward P/E is 20.1.
On all three metrics, I look to buy investments below 20 to consider them undervalued.
These show that Schwab is slightly overvalued right now. And this means buying its stock does not give you enough margin of safety in investing terminology.
When you invest in stocks that have a margin of safety it makes the investment safer. And it also means you should expect to earn higher returns owning it in the coming years.
The inverse of this is also true…
When you invest in a stock without a margin of safety it makes the investment riskier. And it also means you should expect to earn less owning it going forward.
With Schwab being slightly overvalued, it doesn’t give you enough margin of safety to buy now.
For this reason, I recommend you stay patient and wait to buy its stock to Depression Proof Your Portfolio.
If you’re looking for a solid, safe, dividend paying, stable, and enormously profitable investment to buy to Depression Proof Your Portfolio – consider investing in Charles Schwab… But only when its cheaper.
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Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.