Charles Schwab (SCHW)

Total return at 5 years: 6.7%/year = 5.2% appreciation + 1.5% dividend. The target price ($125) is ex-dividend; the $8 in dividends collected over 5 years are added separately.

By both methods, the value today (DCF $194 · Multiples $108) exceeds the market price ($97).

Today — fairly valued: at $97 trades ~9.8% below its value discounted to today (~$108); the discount is positive but does not reach the margin of safety we require (≥38%).

At 5 years — En valor: the target price ($125) plus dividends yield between the 4% floor and the 10% average return — a reasonable return, though without the margin of a great investment.

The bridge: the return at 5 years exceeds the risk-free rate (4.5%) — but the discount does not reach the required margin of safety (≥38%). To require a 15% annual return, it would need to be bought at ~$68.

Educational / informational. Does not constitute investment advice.

The inverse approach: instead of projecting growth to obtain the value, the market price ($97) is taken as given and it solves for what annual owner-earnings growth would need to hold for 5 years for the present value —at the method's rate (4.5%, no-growth terminal)— to equal that price. It is the disconfirmation test: the expectations the price already pays for, contrasted against the method's projection.

The market discounts less growth (-5.4%/year) than we project (10.0%/year) → if the base case holds, there is margin: perception is more pessimistic than the estimated reality.

That growth implies ~$7.4 bn of owner earnings in year 5 (vs ~$15.7 bn of our base case). It recalculates if the DCF assumptions are edited.

A bank is valued on equity (P/E × common earnings + price/tangible book), not EV: deposits and debt are funding. It returns capital via dividend + buyback —the buyback reduces the share count, so earnings per share grow faster than aggregate earnings—. Total return adds the dividend collected along the way. In edit mode, the metric, shares, dividend, and exit multiple can be adjusted.

Charles Schwab is the largest US brokerage and independent investment adviser custodian, in full recovery from the 2022-2023 cash-sorting crisis (net interest margin 1.98% in 2023 → 2.74% in 2025 → 3.00% in the second quarter of 2026). It is valued on equity (P/E × earnings to common + P/tangible book), not on enterprise value. Rolling grid: the base year is the TTM ended 30-Jun-2026, with earnings to common (net income less preferred dividends) at $9,722 million —$8,417 from fiscal year 2025 plus $5,078 from the first half of 2026 less $3,773 from the first half of 2025—, and the projection is 12-month windows (+1y…+5y). The growth rate is normalized without extrapolating the +54% rebound of 2025: +14%/year initially (capturing the continuation of the net interest margin recovery already under way) decelerating to +7%/year. The earnings level is not taken to mid-cycle: the high return on tangible common equity comes from the denominator —the AOCI adjustment still subtracts $10,575 million from equity— and not from peak earnings, and the margin series is coming off a trough, not approaching a ceiling. The ROTCE row is the identity of the two rows above (earnings per share ÷ tangible book value per share, on period-end equity); the company itself publishes a somewhat higher ROTCE (41% annualized in the first half) because it uses adjusted earnings over average tangible equity with deferred tax added back. The base-year dividend is the declared twelve-month figure ($1.18) and year 1 is the rate in force ($0.32 quarterly = $1.28/year, raised 19% in January 2026), growing ~9%/year afterward. Buybacks reduce the share count ~2%/year, the sustainable pace — not the −5.2% of the prior TTM, inflated by buybacks concurrent with TD Bank's exit as a shareholder (a $13,100 million secondary offering in 2025). Base case: exit multiple 12.5× P/E (within the band for an investment bank/brokerage, 10-14×, disciplined from today's multiple) → price target ~$125.

Today's multiple compresses on its own going forward as the metric per share grows (accelerated by the buyback, which reduces the share count). The exit multiple at 3 years is higher than the terminal at 5 years —at 3 years there is more growth still ahead—. Total return adds the dividend collected; the required return is applied to the base scenario.

They are valued separately, with their own rationale, and are not incorporated into the base or the verdict (they are excess return). When assigning them value — in Editmode —, the total with optionalities updates live, without moving the base.

The verdict, the base CAGR, and the margin of safety are always calculated on the base; optionalities do not alter them (with optionalities at $0 they do not move).

Each card fixes a required annual return and answers: if the business is worth $125 in 5 years, what is the maximum that can be paid today to obtain that return? Since it now trades at $97, the margin of safety is how much cheaper the market is than that maximum. The three thresholds: 4% covers inflation (the floor), 10% is the long-term average return, and 15% is the level of a great investment.

With a target price of $125 in 5 years plus $8 of dividends collected (the dividend adds to the return, not to the price) and a required return of 4.5% annually, the maximum to pay today is $108. Against the current market price ($97), the margin of safety is 9.8% (trades below the maximum → there is margin) and the total return at that price would be 6.7% annually.

• Multiple vs the band. 17× earnings (7× tangible value) — above the investment bank/brokerage band [10,14] P/E. The exit multiple (12.5x) is disciplined down from there.
• Near highs. The market already reflects much of the operating recovery.
• Margin of safety. Base case at 5y $125 vs price $97 → total return +7%/year. Modest, with no relevant margin of safety at this price.

• ROTCE vs the 10% bar. 41% annualized in the first half of 2026 (company-published figure) — exceptional (≥20%), though unusually high because tangible capital remains depressed by the AOCI adjustment: without it, it would be around 16%.
• Credit quality. No material net losses over the last four years; a $37 million reserve (0.06%) on $67,033 million of bank loans, with $26 million nonaccrual — a minimal-risk credit book, secured by securities and low-loan-to-value mortgages.
• Capital. CET1 24.4% at Jun 30, 2026 (well above any minimum), though the adjusted Tier 1 leverage ratio (6.8%, target 6.75%-7.00%) is the real constraint the company itself discloses.

Annual levels from the official filing (10-K); the % over each bar is the year-over-year (YoY) growth vs the prior year.

Schwab's engine is client asset volume × net interest margin plus management fees, with a smaller but more cyclical transactional component (average daily trades). Client assets and securities-backed loans grow with net new flows and market levels; net interest margin is the variable most sensitive to the rate cycle and client cash sorting.

The % are the annual (year-over-year) growth: each year —historical and projected— vs the prior one; the TTM (trailing 12m) vs the TTM of a year ago, to avoid overlapping windows. The historicals are exact figures from the official filings; the projected years come from the year-by-year model (the intermediate years without their own series are interpolated between the anchors). The projected columns (+1y…+5y) are 12-month windows counted from the TTM close (30-jun-2026): the projection starts from the most recently reported data, not the fiscal year. The projected base is realistic and unbiased — the risk discount is applied at the end, via the required return. The rationale for each metric is in the (i).

• Real, not nominal. The growth (revenue +22% in 2025) is real, driven by the net interest margin recovery and client asset growth, with no meaningful monetary distortion.
• Growth engine. The net interest margin recovery (not fully extrapolable) plus the more stable growth of client assets (+22% year over year) and management fees.
• Cyclicality. The +22% rebound in 2025 combines the NIM recovery (partly not extrapolable) with record trading (cyclical) — not fully extrapolated forward.

• Relevant in 10 years (recurrence). Brokerage, custody, and asset management will remain essential; Schwab is the largest custodian in the independent advisor industry.
• Pricing power. Limited on trading commissions (driven to zero by competition), but strong on net interest margin via client cash funding.
• Moat and its direction. Wide, stable moat: client asset scale plus switching costs of the custody relationship, especially in Advisor Services.
• Cyclicality. Net interest income (the largest revenue source) depends on the rate cycle and client cash sorting — the 2022-2023 crisis showed it starkly.

• ✓Capital adequacy (CET1)CET1 24.4% (+17.4pp above the minimum)
• ✕Reserve coverage (allowance / loan book)0.06% of the loan book
• ✓Credit quality (net charge-off rate)0.00% annually
• ✓Value creation (ROTCE − 10% bar)+31pp
• ✓Funding (deposit base)Deposits $249.7 bn

A traffic-light interpreted by the method (not generic): float (negative WC) adds up, capex is judged by incremental ROIC (malinvestment test), and a lender is not subjected to corporate solvency. The (i) shows the derivation of each number.

ⓘ Has a loan book: credit health (delinquency, coverage, normalized CECL, RoA/RoE) is evaluated separately, not with corporate solvency.

• Capital. CET1 24.4% at Jun 30, 2026, well above any minimum; the real constraint (as disclosed by the company) is the adjusted Tier 1 leverage ratio (6.8%, target 6.75%-7.00%).
• Credit. No material net losses on bank loans over the last four years; the reserve is minimal because the book's risk is minimal (loans secured by securities and low-loan-to-value mortgages).
• Funding. Deposits $249,682 million plus clients' uninvested cash — low-cost funding, but the very source of the cash sorting risk in a rate shock.

How cash comes in and how it is deployed. In green, the business's own cash (the owner-FCF it generates and reinvests); in gray, the float and credit — customer and funding money, which is not the shareholder's.

In 2025 Schwab returned more than its net income to common (dividend $2,366 million + buyback $8,224 million TTM against common earnings of $9,722 million over the trailing twelve months) through the buyback tied to TD Bank's exit ($13,100 million secondary offering, with a concurrent buyback of 58.2 million shares) — funded by excess regulatory capital (CET1 24.4% at Jun 30, 2026, well above the requirement), not by a sustainable buyback rate. The normalized forward pace is more moderate: ~55% of earnings toward buybacks, ~30% toward the dividend, retaining the rest for regulatory capital.

Who owns the shares — the alignment and whether there is a controlling shareholder.

• Skin in the game. Founder Charles R. Schwab holds ~5.9% (high in absolute terms); directors and executives as a group hold 6.3%.
• Capital allocation. Returned more than net income to common in 2025 via the buyback tied to TD Bank's exit, funded by excess regulatory capital (CET1 24.4% at Jun 30, 2026).
• Execution / integrity. The complete net interest margin recovery (1.98%→2.74%) through the Bettinger-to-Wurster transition reflects solid execution after the 2022-2023 crisis.

• There's no clear source of discount: the stock is in a visible, widely covered operating recovery — no forced sellers, no non-recurring item sinking results.
• The market has already priced in much of the recovery: the multiple paid (17× trailing-twelve-month earnings) reflects the genuine improvement in net interest margin (1.98% → 2.74% → 3.00% in the second quarter of 2026) and net revenue (+20.3% year over year).
• No missing buyers are identified — it's the country's largest brokerage custodian, widely followed — so the expected return (+7%/year) comes out modest: today's price already pays for much of the quality and the recovery.

Schwab doesn't fit the classic taxonomy of a cheap stock: there are no forced sellers and no missing buyers, after a complete operating recovery. The business improvement (NIM 1.98%→2.74%, net revenue +22%) is real, but much of it is already in the price. Normalizing the forward growth pace and with a disciplined exit multiple, the expected return (+7%/year) comes out modest: today's price reflects nearly all the quality, leaving little margin of safety.

The annual return (CAGR at 5 years) in each scenario, with the total period return below — the margin of safety made visual: upside range wide, downside range narrow.

Even in the bear scenario, the return holds at -4%/year (-19% total): the margin of safety protects the downside. The bull (+13%/year, +85% total) exceeds it comfortably — a favorable asymmetry, with a narrow downside range and a wide upside range.

• Rate cycle and cash sorting. The central disconfirmer: a rapid rate hike would reactivate client cash migration toward higher-yielding alternatives, as in 2022-2023.
• Demanding valuation. 7× tangible book value and 17× earnings — any earnings or cycle disappointment would sharply compress the multiple.
• Financial-system contagion. Perceived solvency problems at other institutions can damage Schwab's reputation or access to liquidity with no direct connection to its own risk.
• Geographic concentration. 41% of the First Mortgages/HELOC portfolio concentrated in California — regional concentration risk, though historical performance has been consistent with the rest of the portfolio.

Each thinker's analytical framework applied to our data.

• Buffett / Graham Quality + margin of safety

  A wide moat and ROTCE 41% above the 10% bar, but the margin is limited (+10%) → excellent business at a fair price.

• Peter Lynch Growth at a reasonable price (GARP)

  A fast grower growing 10% at a PEG of 1.7 → reasonable for its growth.

• Joel Greenblatt Cheap and high-return (Magic Formula)

  Not applicable — the Magic Formula excludes financials and regulated businesses (EBIT/EV does not capture the operating leverage).

• Howard Marks Perception vs reality + cycle

  The price discounts -5% vs our 10%: perception is more pessimistic than reality, with an identified source of the discount.

• Seth Klarman Capital protection (bear scenario)

  Bear-scenario floor -6%/yr, bull-scenario ceiling +12%/yr over 5y: reasonable asymmetry, without an ample cushion.

• Pat Dorsey Moat strength (Five Rules)

  A wide moat, stable; sources: efficient scale, switching costs, cost advantage, intangibles → passes the Five Rules.

• Aswath Damodaran Expectations implied by the price

  Justifying the price requires discounting -5%, within what we project (10%) — the story squares with the numbers.