Stock Strategist

Scale Gives Schwab a Wide Moat

Michael Wong, CFA, CPA

 Charles Schwab (SCHW) reported record operating profits of $3 billion in 2016, and operating profits should rise significantly in the following years from the compound effect of revenue growth and operating margin expansion.

We project that over the next five years, operating income will more than double from the effect of higher interest rates, growth of the company’s bank, recent strong growth in client assets, and the effect of a lower corporate tax rate. Net interest income is highly profitable, with management aiming for a majority of interest-rate-related revenue to fall to the bottom line. This mix shift to more net interest income will expand operating margins.

Michael Wong, CFA, CPA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.