The tax reform proposal is likely to land on President Donald Trump's desk any day now, giving him a much needed win and providing a windfall for all sorts of corporations. One stock that is expected to benefit from a reduction in the corporate tax rate is Charles Schwab, the leading discount brokerage.
Under the tax reform bill, the corporate tax rate is expected to be reduced to 21%. With The Charles Schwab Corporation (SCHW) paying an increasing corporate tax rate each year, experiencing a 16% jump annually since 2011 by some estimates, the company is expected to benefit if that rate gets lowered.
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Trefis.com, a platform created by a team of MIT engineers and Wall Street analysts that helps investors understand how companies' products affect share prices, said that Schwab's valuation could see a 20% increase from a reduction in the corporate tax rate. "The effective tax rate paid by Charles Schwab, around 37% in the past five years, is in fact much higher than that paid on average by other companies in the U.S.," Trefis wrote in a recent blog post for Forbes. The investment researchers estimate that Schwab's effective tax rate last year was 36.9%, with the firm paying taxes of $1.1 billion. If that rate were lowered to 22%, the tax liability would have declined to $660 million and increased the company's net income by close to 25%.
With little business outside the U.S., Charles Schwab is not expected to benefit much from a tax holiday that will be included in the tax reform bill that enables companies to bring money back into the U.S. at a lower tax rate. This provision should benefit technology companies that have a lot of cash outside the U.S., as they will get a break for bringing it back stateside. Although the discount brokerage will not see a significant benefit from repatriation, because Schwab does not have a big overseas exposure, it will not suffer from a weakening U.S. dollar. What's more, if the U.S. dollar stays weak in 2018, it could increase interest in stocks such as Schwab.
Shares of Charles Schwab were recently trading at $52.04, up $0.23 or 44%. So far this year, the stock is up 24%, with the share price surging since November. The passing of tax reform has been lifting bank and brokerage stocks for some time now, but the lack of a big surge in shares as the bill makes its way to President Trump could be due to some buying on the rumor selling on the news taking place. That phenomenon could even continue in the next year, injecting some risk into the long-running bull market.