Dividends and Schwab talks open path for TD to exit US brokerage

In October Charles Schwab Corp announced it was slashing fees for online trading of stocks and exchange-traded funds (ETFs) and options. As an investor you were delighted because some of your fixed costs came down. In the marketplace, Ameritrade matched Schwab’s prices to keep their business at Ameritrade. Schwab had announced price decreases because of many new startups which had low prices. This reduction in prices has changed the business model for trading stocks and bonds.

According to Devin Ryan an analyst at JMP Securities, the moving to zero on commission pricing removed a big barrier to consolidation.

In an article by David Berman and Clare O’Hara of the Globe and Mail, they examined the possible actions of TD Bank which owns 43% of Ameritrade. The lowering of the fees has reduced the profitability of the division, as they figure out a new model. The pricing of the parent relative to other large banks has lagged behind the competition. What are the options for TD? In theory, a merger would allow for some cost savings from closing branches and reduced marketing costs.

If a merger happens, TD could lower the percentage of the company they hold to 10 to 15% if the deal is all stock, and potentially sell the holdings to buy a regional bank.

The difference between Schwab and Ameritrade is Schwab is more diversified into wealth management at received 7% of its revenues from online trading; while Ameritrade had 23% of its revenue from online trading.

Linking to dividend paying stocks, the key to the story is when you hear an area of the economy is undergoing possible restructuring because of price changes, it is time to investigate alternatives. Price changes which reduce profitability means the company has to do something to increase it or merge with another company, whatever happens there will be a time lag. If the company mergers, it will take 6 months to a year; if they have to find new revenue sources, it will take 1 to 2 years, whatever happens means you can move the bulk of your investment to other alternatives and wait to see what happens.

There are more questions than answers, till the next time – to raising questions.

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