While the S&P 500 is considered most representative of the overall market, and the Nasdaq Composite is the leading bellwether for technology stocks, when investors want to know what the market is doing on any given day, they often look to the Dow Jones Industrial Average.
It only includes 30 stocks, representing those of large, influential, blue-chip companies, as determined by a committee. Amid the current market slump, the Dow has held up a bit better than the S&P 500, down 12% year to date versus 15% for the broad index. But over the long term, it has fallen short of the S&P 500, up 9% over the past 10 years on an annualized basis compared to 10.7% for the S&P 500.
The Dow has been a pretty safe bet for investors over the years, but if you are looking for a growth stock with a little more juice and the same type of stability and blue-chip pedigree, consider Charles Schwab (SCHW -1.24%).
The long and the short of it
Charles Schwab has the type of credentials that someday might lead to its inclusion in the Dow Jones Industrial Average. It is an influential company with a stellar reputation as one of the largest brokerage firms in the country. It is a market leader in its space and has a history of steady, consistent growth.
Over the past 20 years, it has posted an annualized return of 10.8%, compared to 6.8% for the Dow Jones Industrial Average. Going back 10 years, it has averaged a return of 17.9% versus 9% for the Dow. Meanwhile, over the past decade, its annual net income has increased an impressive 21% per year, reaching $5.8 billion as of June 30.
Even shorter term, Schwab has outperformed the Dow -- up 2% over the past 12 months while the Dow is down about 9.7%.
Over the years, Schwab has been able to successfully grow its business into a market leader by being innovative and efficient. Schwab differentiated itself early on as a pioneer in low-cost trading. It built its name as the original discount brokerage after it launched in 1971.
It has always prided itself on being early to market as others followed -- whether it was discount trading, online trading, or zero-commission trading, which it implemented in 2019. Another key to its success over the years has been owning its technology, so it can be faster to market and to beat its competitors.
Why Schwab should continue to outperform
The market downturn has not hit Schwab as hard as some of its competitors, because rising interest rates have boosted its interest income, offsetting losses in trading and asset management.
In the second quarter, it generated $5.1 billion in revenue, up 13% year over year, while net income climbed 42% year over year to $1.8 billion. Roughly half of revenue, $2.5 billion, came from net interest income, up 31%. Its business model has been built to navigate various market cycles, as it has beaten the Dow in eight of the last 10 years, including 2015, when Schwab was up 10% while the Dow was down 2%.
There are a lot of reasons to like Schwab's future growth prospects. One, it is attractively valued for a growth stock with a forward price-to-earnings (P/E) ratio of 14, which is below the multiple of 18.9 for the Dow Jones.
Also attractive is its profitability with an operating margin of 44% and a profit margin of 33% -- as well as tons of liquidity. Schwab has $118 billion in cash and cash equivalents with $21 billion in long-term debt and a low 0.5% debt-to-equity ratio.
Its valuation and financials are good, but it also has excellent growth prospects after its acquisition of TD Ameritrade in 2020. Schwab is in the process of integrating this brokerage into its operations. Once it is fully integrated, Schwab should see greater efficiencies, expanded capabilities, and greater scale to drive additional earnings and expand its already market-leading share.
It all adds up to a company that would make a fine addition to the Dow Jones Industrial Average -- and one that would likely outperform it over the long term. And as it has done strategically over the years, Charles Schwab should be well-positioned to pivot and thrive to stay ahead of its competitors.
