TD Ameritrade Holding Corp. (AMTD) reported its first-quarter financial results on Jan. 20, and as investors should have become accustomed to, it wasn't sexy but was solidly within expectations. Profits were flat while revenue declined slightly, but the online broker and investment advisor continues to execute on its asset growth, adding net new client assets at a double-digit rate. TD Ameritrade also lowered its operating expenses and grew interest rate-sensitive assets, potentially setting it up for nice profits as interest rates rise over 2016.
Here's a look at the results.
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What happened in the quarter
- The decline in revenue and flat earnings was tied to a reduction in trading activity. Trading revenue declined by $31 million in the quarter.
- Average daily trades of 438,000 was 4% lower year over year and the trading activity rate of 6.6% was the lowest in six quarters.
- A $21 million increase in asset-based revenues and $6 million in lower operating expenses offset most of the decline in trading revenue and kept profits flat.
- Interest-rate sensitive assets increased 9% to $110 billion, highest ever for the company.
- Total cash deposits have steadily grown with net new deposit growth and resided at $102.6 billion at quarter's end. When held in interest-sensitive accounts, this extra cash should drive more income as interest rates increase.
- Cash as a percentage of client assets has decreased since the end of 2011, but over the past two quarters, it has increased about 130 basis points.
It's important to know that trading activity isn't something TD Ameritrade can influence much, but it is more a factor of investor sentiment. Management said that investors seemed to be acting more cautiously near year-end, and that was key to the decline in trading activity. However, the company can focus on growing its asset base, including interest-sensitive deposits, where it makes money off the rate spread, in order to help offset the ups and downs of trading sentiment. Over the past several years, it has done just that, consistently growing assets of all types.
What management said
The recent Federal Reserve rate hike will be good for TD Ameritrade, adding to the bottom line in 2016. But it's a steady, long-term process. As CEO Fred Tomczyk said::
We are also quite pleased that for the first time in nearly a decade, the Fed has raised interest rates. We have operated quite well through a prolonged difficult economic environment. And while challenges and uncertainties remain, this action is a positive from an earnings perspective. Since 2008, we have worked to evolve our business model and position TD Ameritrade for a different rate environment. ... We expect this first 25 basis points move to result in no less to 2016 revenues of $50 million to $80 million.
According to CFO Steve Boyle, that revenue gain will result in $0.08-$0.12 per share in incremental earnings over the following 12 months.
Tomczyk also spoke about the importance of investing in growth, both in technology and services:
The needs of today's investor are evolving and a growing number of investors are looking to investment firms to give them a more comprehensive personalized investing experience. These are investors who want advice and long-term investing solutions but want to remain involved in the management of their investments. ... We are strengthening our fee based portfolio advice offerings including a complete redesign of the post-sale Amerivest experience updating the experience with new designs and new features and formats. We are also enhancing our service models to provide more one-on-one services and support to our high net worth clients. We are fine tuning our sales model to better align clients with services that meet their needs. We are introducing more comprehensive goal planning solutions and we are introducing new advisor and client technology. These investments and our long-term growth are aligned with what today's investors' needs and how we see those needs evolving in the future.
TD Ameritrade management has done a solid job of driving asset growth since the Great Recession and across multiple asset types, including in trading accounts, fee-based asset management, and interest-bearing instruments as well. The likelihood that the Fed will raise interest rates multiple times this year -- and that rates will go up in years to come -- is also on track to boost earnings and help smooth out some of the lumpiness in earnings from the ups and downs of trading activity.
The dividend was increased 13% in the quarter, and 1 million shares of stock were repurchased, returning $129 million in capital to shareholders.
Put it all together and it's another "slow and steady" quarter for TD Ameritrade, with solid execution on management's strategy for growth. Over the past five years, earnings per share has increased 41%, and that's with interest rates essentially at zero. Will the long game of asset accumulation accelerate profit growth as rates go up? Time will tell.