Business is getting better at E-Trade Financial (NASDAQ:ETFC), and that has investors wondering who — if anyone — will buy the once-troubled online broker. Charles Schwab (NASDAQ:SCHW) and TD Ameritrade (NASDAQ:AMTD) are the leading candidates, although both will have a hard time pulling the trigger given E-Trade’s risky mortgage portfolio.
Forget mergers and acquisitions for a second, though, and instead let’s focus on the two potential suitors. The way I see it, investors should sell Schwab and buy TD Ameritrade. Here’s why:
Both firms have a decent amount. TD Ameritrade’s insiders include founder Joe Ricketts, who recently retired from the board to dedicate more time to his other ventures, the Chicago Cubs and the American Film Company. All told, its executive officers and directors as a group own 13.6% of its stock. Charles Schwab’s insider ownership is 17.5%, with most held by its founder, Charles R. Schwab.
What breaks the stalemate in terms of ownership is Toronto-Dominion Bank (NYSE:TD), TD Ameritrade’s largest shareholder at 45%. TD sold its former discount broker in 2005 to Ameritrade and stayed on for the ride. Electing five of the 12 members of the board, it should be reassuring to TD Ameritrade investors that a bank as capably run as TD continues to value its investment in the discount broker. It certainly gives TD Ameritrade an edge when it comes to financing growth. Risk-averse investors might even consider owning TD Bank stock instead, which gives you indirect ownership in TD Ameritrade as well as direct ownership in one of the world’s best-run banks.
We’re comparing apples and oranges in this instance because TD Ameritrade’s most recent quarter is its third, but it is Charles Schwab’s second. Nonetheless, we still can look at some of the key numbers from both their quarterly reports.
In terms of pre-tax profit margin, TD Ameritrade’s is 460 basis points higher at 37%. TD Ameritrade also had a higher annualized return on shareholder equity at 15.1% — 110 basis points higher than Charles Schwab. TD Ameritrade’s total client assets increased 28% to $414 billion, while Charles Schwab’s client assets were $1.7 trillion — an increase of 22%.