Corporate Tax Cuts Could Drive 20% Upside To Charles Schwab’s Valuation
Charles Schwab (NYSE:SCHW) has performed strongly over the past five years, with annual revenue growth of around 10%. With a majority of its operations in the U.S., which has one of the highest corporate tax rates globally, the company’s taxes have increased an even greater 16% annually since 2011. With a plan to overhaul the tax system in the United States and reduce the corporate tax rate being passed by the Senate, a new corporate tax rate could come in at 20-22%. If this were to occur, Charles Schwab would benefit meaningfully, as – unlike many other large U.S. corporations that have been able to reduce their effective tax rates – its tax bills have remained fairly high. In recent years, its effective tax rate (which is a blend of federal, state and local taxes) has been around 37%. Below we take a look at how much the brokerage could benefit from tax reform, and the resulting upside to its valuation.
Our price estimate for Charles Schwab’s stock stands at $42, which is below the market price.
Schwab Pays A Huge Tax Bill
While the statutory rates in the U.S. are quite high, most companies end up paying a significantly lower effective rate as deductions and credits help to reduce their tax liabilities. According to a recent report published by the Congressional Budget Office, the average tax rate actually paid by corporations in the U.S. was about 18.6% in 2012, which is substantially lower than the rate that the Trump government has proposed. According to CSIMarket, on a trailing 12 months basis, the average effective tax rate is 25.7%. The effective tax rate paid by Charles Schwab, around 37% in the past 5 years, is in fact much higher than that paid on average by other companies in the U.S.
Upside To Schwab’s Value
During 2016, the company’s earnings before income taxes were $2.99 billion, and it paid taxes of $1.1 billion, implying an effective tax rate of 36.9%. If its tax rate was instead 22%, its tax liability would have been close to $660 million, and its earnings after taxes would have risen to $2.34 billion, up from $1.89 billion. This would mean its net earnings would have grown by over 23%. Looking forward, a fall in the company’s effective tax rate to around 22% could boost its net income by nearly 25%, as shown in the table below. This in turn would give a boost to its valuation by over 20%, which can be further explored from our interactive chart below.
See our complete analysis for Charles Schwab.
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