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April 17, 2019 | The Charles Schwab Corporation | SCHW

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This week’s Stock of the Week is more diverse—and stronger—than you think.

Banking on Behavior

The Charles Schwab Corporation (SCHW) is incorrectly seen by many investors as just a brokerage offering low-priced investments. But that is only part of the story.

To get high ongoing returns, companies must possess sustainable advantages. Of the different types, behavioral ones are the most enduring. That is what Schwab has, because it owns a bank in addition to its investment arm. It pays low interest on cash deposits, including ones held by Schwab investors—who, for behavioral reasons, stay with the convenience of easy in-and-out money within the Schwab platform. This low cost of funds boosts Schwab’s whole business. And as a bank, it can lend—at high rates—for everything from margin loans to mortgages. All this is on top of the better-known part of Schwab’s business, in the brokerage field.

Even if the US economy slows over the next couple of years, Schwab’s banking strength should help it achieve continued revenue and earnings growth. Revenue was $10.13 billion last year and is likely to be $11.07 billion this year and $11.76 billion in 2020. And Schwab’s dividend of $0.68/share/yr. recently yielded 1.53% and appears secure.

Fiscal year: December. Earnings per share: 2020 est./$3.09…2019 est./$2.80…2018/$2.45.

Elliott Savage is partner at YCG Funds, Austin, Texas, which manages $650 million, and portfolio manager of the $215 million YCG Enhanced Fund (YCGEX). YCGFunds.com

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