Charles Schwab Corp. (SCHW, Financial) (“Schwab”) was first purchased in the Sequoia portfolio in 2016. We opportunistically added to the position at approximately $30 per share in very early 2020. Schwab reentered the list of top ten positions for the Fund this year thanks to stock price appreciation that reached almost 60% in 2021.
In late 2019, Schwab reached an agreement to acquire TD Ameritrade for $26 billion. This transaction was completed in October 2020. As such, 2021 was the first full year for the combined entity. As a result, Schwab’s reported revenues and profits surged in 2021. More fundamentally, Schwab’s profitability, as measured by pre-tax margins (48%) and return on tangible equity (22%), reached levels not seen in years. This improvement in profitability was driven by increased scale from the merger, the partial realization of merger synergies, and buoyant equity markets, all of which offset continued pressure on net interest margins caused by the low-rate environment.
Operationally, Schwab continues to work its way through its multi-year integration of TD Ameritrade. At the same time, the company is investing heavily in systems and headcount to support the unprecedented levels of client activity that materialized during the pandemic and that have yet to normalize. We believe Schwab will manage through these various projects, but it bears watching.
Despite the challenges of the past two years – the onset of the pandemic, the subsequent surge in client activity, the ongoing integration of TD Ameritrade – Schwab’s asset gathering machine has continued to hum along. In 2021, Schwab grew total client assets 8% organically. In the year prior, the company grew total client assets 7% organically.
We attribute these impressive organic asset flows to Schwab’s strategic position, which, in our view, remains very strong. We believe Schwab’s broad product offering, responsive client service, low-cost position, and trusted brand position the company to compete effectively, now and in the years to come, with the various incumbents as well as the more digitally-oriented start-ups.
From Ruane Cunniff (Trades, Portfolio)'s Sequoia Fund 2021 annual report.
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