E*TRADE Is Doing Better Than You Think

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As long as you don't hurt yourself with the dilution, E*TRADE (Nasdaq: ETFC  ) has a plan to improve its financial state.

The discount broker announced a plan to beef up its capital structure yesterday. It's launching a secondary offering to sell $400 million worth of new stock. It's also offering more than $1 billion in zero-coupon convertible debt, in exchange for a good chunk of its interest-bearing notes.

Citadel Investment Group, the company's largest creditor and investor, is naturally on board. It plans to buy as much as 25% of the new stock and has committed at least $800 million for the debt swap. With Citadel's CEO joining E*TRADE's board last week, it would have been a shock if Citadel wasn't on "board" with the initiatives.

Mr. Market isn't happy, though. The shares were down 12% yesterday. Given the convertible feature of the new debt and the decision to flood the market with $400 million in freshly minted stock, the dilution will be massive.

Regardless, I still like the move. Standard & Poor's downgraded the broker's debt last month, and E*TRADE tipped off investors back in April on the need to raise capital. The stock offering will arm the company with greenbacks, while swapping out notes for zero-coupon bonds will help it preserve greenbacks by reducing its interest-expense exposure. This probably won't be enough to make E*TRADE profitable like rival discounters Charles Schwab (Nasdaq: SCHW  ) , optionsXpress (Nasdaq: OXPS  ) , and TD AMERITRADE (Nasdaq: AMTD  ) , but it's a step in the right direction.

The company's metrics for May are inspiring. It closed out the month with 23,000 more brokerage accounts than it had at the end of April. Daily average revenue trades clocked in at 239,439, a 4% sequential improvement and a healthy 34% upgrade from May of 2008. Delinquencies in its loan portfolio are also improving.  

The only downer is a decline in the number of banking accounts, but that's been going on for awhile. When your flagship Complete Savings Account (CSA) vehicle goes from yielding a healthy 3.01% at the beginning of the year to an uninspiring 0.95% today, you're going to lose a fair share of yield chasers.

Then again, chunky distributions are hard to find these days. Even General Electric's (NYSE: GE  ) traditionally buoyant GE Interest Plus is sporting a mortal yield of as little as 2.38%. eBay's (Nasdaq: EBAY  ) once-competitive payouts for money parked at PayPal are now yielding a pedestrian 0.14%.

E*TRADE's online banking growth will return when yields spike higher. Between now and then, it's comforting to see the company clicking on the brokerage front and taking the appropriate -- though dilutive -- steps to improve its capital structure.

In the market for a new discount broker? The way that rates and initial deposits are bouncing around, we can't say we blame you. Check the sponsored broker comparison table in the Discount Broker Center, to see whether you can find the bargain-minded brokerage outfit that's right for you.

eBay, optionsXpress, and Charles Schwab are Motley Fool Stock Advisor selections. eBay is a Motley Fool Inside Value pick. Try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz believes in self-service gasoline pumps and self-service stock brokerages. He owns no shares in any of the companies in this story and is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.

Read/Post Comments (6) | Recommend This Article (24)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 18, 2009, at 7:02 PM, kamuirei wrote:

    Why is the fool pumping E*Trade so much?

  • Report this Comment On June 18, 2009, at 8:21 PM, ST0CKTRADER wrote:

    The debt swap deal with citadel (although a steal on the price conversion) I believe has taken bankruptcy off the table. if that holds to be true, even with shareholder dilution etrade is a guaranteed multibagger. I am considering buying some tomorrow as i think the dilution news is overplayed. we'll see what happends. fool on.

  • Report this Comment On June 19, 2009, at 12:08 AM, iContrarian wrote:

    When everyone is afraid getting greedy is the mantra I have applied in buying Netflix, Tata motors and Nokia.

    I have applied the same with Etrade more so - greedy as well as gutsy. Testing not luck but my Foolishness.

    Rick, thanks for writing this article. I may buy more if the price goes down.


  • Report this Comment On June 19, 2009, at 1:55 PM, plange01 wrote:

    e-trade has far to much hedge(trash) fund involvement and will declare bankruptcy by the fall...

  • Report this Comment On June 19, 2009, at 6:47 PM, ST0CKTRADER wrote:

    the right pricing with their stock offering could of garnered wallstreet support and rallied the stock and gained upgrades by analysts today, instead they lowballed the stock offering at 1.10 which resulted in eyepopping volume of 389 million shares traded! talk about a blow in investor confidence! they really shot themselves in the foot on that one. the s&p downgrade will likely be followed up by more analyst downgrades which will further push the stock lower....very well may be seeing the beginning of the end to etrade.

  • Report this Comment On July 31, 2009, at 6:47 PM, RichardLC wrote:

    LOL, yes, when the majority of the "wise guys" in the comments section trash something it's definitely time to stock up.

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