Morningstar | TD Ameritrade Will Still Have Decent Base of Trading Revenue Even if Equity Pricing Collapses
Narrow-moat TD Ameritrade reported fairly strong earnings in its fiscal fourth quarter ended September, but fears of a decline in trade pricing may be weighing on the share price. On an adjusted basis that primarily excludes costs related to the Scottrade acquisition that closed in September 2017, earnings per diluted share increased to $0.92 in the fiscal fourth quarter compared with $0.80 in the fiscal first quarter. Net revenue increased $141 million, or 11%, to $1.4 billion since the first quarter, with most of the increase coming from margin interest.While approximately 80% of the company's interest-rate-sensitive assets are in its bank deposit accounts, revenue from those accounts only increased to $392 million from $381 million in the first quarter. The low revenue growth from the bank deposit accounts despite rising interest rates is from lower deposit balances, which is a trend across the investment services industry, and only a small uptick in the account fees to 1.36% from 1.25%. There's a lot of potential uplift to revenue from the deposit balances, with a management estimate of an incremental $900 million in seven years if the portfolio completely reprices at current interest rates, but it will be a relatively extended grind higher for revenue. That said, earnings per share can still achieve double-digit growth through operating expense leverage. We don't anticipate making a material change to our $62 fair value estimate and believe that shares are currently fairly valued to moderately undervalued.
TD Ameritrade is fairly sensitive to pricing competition, with the stock falling 7% when JPMorgan's trading promotion for new accounts was in the headlines. It's true that 34% of TD Ameritrade's net revenue was transaction-related in the quarter, but we roughly estimate only half of that would be from equity or exchange-traded fund trading commissions. Additionally, asset-based fees should grow as a percentage of revenue going forward.
Besides JPMorgan's promotion for its You Invest platform, Fidelity announced its ZERO line of index funds and Vanguard announced the expansion of its no-transaction-fee platform to nearly 1,800 ETFs in the third calendar quarter. While many firms have announced a $0 fee offering, nothing is truly free, and there are myriad strategies for companies to profit. For our recent analysis of the various ways robo-advisors monetize client assets, please see our June special report, "Robo-Advisor Upgrade! Installing a Program for Profitability."
Along with fiscal fourth-quarter results, TD Ameritrade announced that it is increasing its quarterly dividend 43% to $0.30 per share from $0.21.
TD Ameritrade Holding is a holding company. Through its subsidiaries, the company is a provider of securities brokerage services and related technology-based financial services to retail clients and independent registered investment advisors. The products and services available to the company's clients include: common and preferred stock, Exchange-Traded Funds, options, futures, foreign exchange, mutual funds, fixed income, new and secondary issue securities, margin lending, cash management services, and annuities. The company provides the client service and support through the following means: websites, branches, email, telephone, TTY services for the hearing impaired, and mobile app.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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