In the past few months, the market has favored stocks that benefit from a rising interest rate environment, such as financials and energy. Charles Schwab (SCHW +0.57%) is one company that has welcomed this, with its stock up 85% since September 2020.
In the past year, the company made a couple of key acquisitions that grew its customer base and expanded its technology offerings for customers. Investors got a taste of what it will be like going forward in the company's fourth-quarter earnings, which is the first earnings period that includes TD Ameritrade's financials. The integration of acquisitions will be key to the firm's future growth and should help the stock keep winning in 2021.
Acquisitions added over 15 million new accounts
Charles Schwab made a splash with acquisitions in 2020, which it needed to keep pace with Morgan Stanley, which acquired E*Trade last January for $13 billion. Schwab acquired TD Ameritrade during the year for $22 billion in stock, adding 14.5 million new brokerage accounts along with $1.6 trillion in client assets in the process.
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That wasn't the only big move the company made in 2020. In May, Schwab acquired USAA's investment management company for $1.6 billion in cash, adding another 1.1 million brokerage accounts along with $80 billion in client assets. Not only that, but the deal also makes Schwab the exclusive provider of wealth management and investment brokerage services for USAA members.
Between the two deals, Schwab added over 15.8 million brokerage accounts and nearly $1.7 trillion in client assets. Compared to the prior year, the firm's total client assets increased by 66% to $6.69 trillion while growing total brokerage account 140% to 29.6 million.
These acquisitions will be a driver of growth for Charles Schwab. That's because its increased brokerage accounts and client assets will boost net interest income, due to higher amounts of cash on hand, and will also benefit trading revenues, thanks to a larger client base of brokerage accounts.
A resilient year in the face of the pandemic
The pandemic hit Schwab's bottom line, with net income of $3.3 billion in 2020, down from $3.7 billion the year before. The decrease was due largely to the low interest rate environment, which increased prepayments on mortgage-backed securities and drove down yields on other investments, driving down net interest income.
Despite this, Schwab still had a resilient year. With TD Ameritrade's earnings included in the company's earnings for the first time in the fourth quarter, investors have reason to be optimistic. The quarter saw net income grow to $1.1 billion, up from $698 million in the third quarter and up from $852 million in the fourth quarter of 2019. The company also announced it added $119.4 billion in core new assets during the quarter, a record for the firm.
Even though the acquisition of TD Ameritrade was only included in one quarter of earnings, it helped Schwab in a few key areas, thanks to the growth in interest-earning assets. Net interest revenues for the full year declined less than anticipated, down 6% to $6.1 billion, while trading revenues grew by 88%, to $1.4 billion.
CFO Peter Crawford said the acquisitions of TD Ameritrade and USAA's investment management company make Schwab a more resilient business. They do so by increasing the company's efficiencies, which will improve profit margins and enhance one of Schwab's biggest strengths versus its peers.
Improving on its competitive advantage
Charles Schwab has a history of efficiently managing its business, resulting in top-notch profit margins. The company has seen stellar stock price performance since September, rising 85% through Monday's session. Financial stocks should continue to perform as investors adjust in anticipation of a higher interest rate environment, which should serve as a tailwind for the company's stock.
The integration of the company's acquisitions and the improved efficiencies can keep Schwab on the winning track. The integrations enhance the company's competitive advantage, which should further boost profit margins, making Schwab a great long-term investment opportunity.
