Look Who Won't Be Buying in the Brokerage Sector

TD AMERITRADE's (NYSE: AMTD  ) investors are probably wiping their collective brow over the news. Earlier this week, company CEO Fred Tomczyk put the kibosh on two "obvious" acquisition opportunities. The first one, he said, was privately held and not for sale by its owner. The second had "some balance sheet issues to work through." So TD AMERITRADE is apparently not going to bite on either. Tomczyk didn't name the two firms, but it's obvious to anyone tracking the company that he meant Scottrade and E*TRADE (NASDAQ: ETFC  ) .

Not so pretty
E*TRADE's been the focus of takeover rumors since the Roman Empire dominated civilization. Or at least it seems like that long since those whispers started to circulate, on the back of the firm's chronically poor financials and unbalanced balance sheet.

It's been a habitual spiller of bad ink. Just taking the last few years into consideration, in 2007 to 2011 inclusive, it posted a net profit exactly once. That was in 2011, and it wasn't like those numbers were spectacular; net came in at $157 million, on $2.4 billion in revenue.

That's a 7% margin for you sports fans counting at home. Meanwhile, rival discount brokerage Charles Schwab (NYSE: SCHW  ) clocked 18% the same year, and TD AMERITRADE recorded 22%. E*TRADE's number was more akin to a flailing big financial like Bank of America (NYSE: BAC  ) , which was still laboring to get past the lingering effects of the financial crisis.

E*TRADE started what looked like a winning streak earlier in the year, when it posted two consecutive quarters in the black. But then in 3Q, it was back to its loss-making ways, posting a $29 million shortfall on the bottom line.

Out of balance
Those "balance sheet issues" Tomczyk alluded to certainly apply to E*TRADE. The company has worked hard to consolidate its loan portfolio after dipping into traditional banking with limited success some years ago. It's making progress getting rid of the unwanted stuff, but this hasn't really moved the needle on the company's assets. These stood at $50 billion at the end of 3Q, not much higher than the $48 billion at the end of 2008.

TD AMERITRADE, by contrast, had $19.5 billion in its most recent quarter, a nice rise from the $16 billion of end-2008. Those numbers for acquisition-happy Schwab were $117.7 billion and $51.8 billion, respectively.

E*TRADE also runs a fairly high risk of getting smacked by debt compared to other brokers. More than half of what it currently owes is categorized as short term debt, and at $4.6 billion this is considerable. That doesn't even count the current portion of long-term debt. In fact, all but $22 million of the company's indebtedness is of the short-term/current variety. This is a concern, as total indebtedness amounted to over $8.4 billion and the company had less than $4.3 billion in cash and equivalents to deal with it.

Better presents to buy
Besides, TD AMERITRADE just doesn't seem to be in a mood to purchase anything. Part of this must be due to current conditions for brokers -- they've been struggling with relatively low trading volumes lately, not to mention thin interest rates that make many financial products unattractive to clients. It's a batten-down-the-hatches sort of environment out there; no one's really eager to play pirate and launch a raid on an enemy ship.

Besides, that's not how the company wants to spend its money. It would rather disburse its booty through shareholder payouts, as evidenced by the decision earlier this year to lift its dividend a full 50% (to $0.09 per share). This now gives it a decent yield for a financial sector stock, at 2.2%.This attracts notice from investors who would otherwise favor Schwab, with its 1.9%, and places the firm nearer the yields of monster banks such as Wells Fargo (NYSE: WFC  ) , at 2.7%.

Also, admirably, the company's spending much of its cash on internal improvements, hiring salespeople, boosting its technological foundations, and offering a wider palette of services, such as forex trading.

Missing out on a bargain?
In a way, it's a shame TD AMERITRADE isn't ostensibly interested in E*TRADE, because there's value in the company. It's got about 4.4 million accounts of various types and a market cap of $2.4 billion, meaning investors put the average worth of each account at something like $545. Even if a limited number of those accounts are frequent traders, a buyer could still make a decent return on them if it played its cards right.

And 4 million-plus accounts would be a nice addition to the client rolls of any discounter, TD AMERITRADE included. At the end of the day, though, the company's just not in the hunt. Maybe someone else will take the initiative and snap up E*TRADE. After all, it's looking rather cheap these days.

To learn more about the most talked-about bank out there, check out our in-depth company report on Bank of America. The report details Bank of America's prospects, including three reasons to buy and three reasons to sell. Just click here to get access.


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