Online brokerage TD Ameritrade said Tuesday that its profit fell 27 percent in its fiscal fourth quarter as slower trading activity translated into less revenue and expenses rose.
The results came up short of Wall Street expectations. But the company said it will initiate a dividend of 5 cents per share.
Its shares lost as much as 5 percent before rebounding to close up 4 cents at $16.79.
"While none of us certainly expected to see the challenging environment extend this long, the fact is that it has and will likely continue to be a challenge for firms like ours moving forward," TD Ameritrade CEO Fred Tomczyk said during a conference call with analysts.
Current record-low interest rates limit how much TD Ameritrade earns on its clients' deposit accounts and other investment products. So until interest rates start increasing, trading commissions will likely drive much of the Omaha-based company's earnings.
The average number of trades Ameritrade handled fell 23 percent during the quarter to 317,684 trades per day. That contributed to a 31 percent drop in transaction-based revenue as Ameritrade generated $250 million from those trading-based fees.
TD Ameritrade was able to increase its asset-based revenue 21 percent in the quarter because it attracted additional client assets. The company said its $324 million in asset-based revenue helped offset the quarter's slower trading.
Tomczyk said paying a dividend makes sense because Ameritrade has been able to consistently continue generating large amounts of cash even during the Great Recession, so the $115 million annual cost of the dividend shouldn't be a burden.
"I'm very happy with how we held up in a tough environment," Tomczyk said.
Even with the dividend, Tomczyk said Ameritrade has enough liquid assets _ roughly $1.1 billion at the quarter's end _ to remain in the market for acquisitions.
"We just haven't found one that makes both strategic and financial sense in this environment," Tomczyk said.
FBR Capital Markets analyst Matt Snowling said in a research note that Ameritrade's strong capital position sets it apart from its peers, so investors who can wait until interest rates rise may be rewarded by owning the stock.
"Although the quarterly results were below expectations, we believe the underlying core client asset growth and cash flow generation of the overall business remain strong, giving management the flexibility to redeploy meaningful levels of capital back to shareholders while also keeping powder dry for additional accretive acquisitions," Snowling said.
TD Ameritrade Holdings Corp. reported net income of $114 million, or 20 cents per share during the three months ended Sept. 30. That's down from $157 million, or 26 cents per share, a year ago.
Its revenue fell nearly 8 percent to $609 million from $658 million a year ago.
Analysts surveyed by Thomson Reuters expected earnings of 23 cents per share on revenue of $619.2 million on average.
TD Ameritrade's expenses grew 4 percent to $411.6 million. Most of the increase in spending was related to last year's acquisition of options-trading firm thinkorswim and a $6 million increase in advertising spending. The company also hired about 100 new sales consultants for its branches.
Credit Suisse analyst Howard Chen said in a research note that trading was slower in the summer because activity returned to a more normal, seasonal trend, but he remains neutral on the stock because he expects trading will remain weak and low interest rates will continue to weigh down TD Ameritrade's earnings.
"While management has executed soundly and fundamentals have remained strong for the franchise, we remain on the sidelines," Chen said.
Ameritrade said it expects to earn between 90 cents and $1.20 per share in its 2011 fiscal year. Company officials say they are not planning on any interest rate increases during 2011.
Analysts expected earnings of $1.14 a share for fiscal 2011.
Through all of fiscal 2010, Ameritrade reported net income of $592.2 million, or $1 per share, on $2.56 billion revenue. A year earlier, it had net income of $643.7 million, or $1.10 per share, on $2.4 billion revenue.
TD Ameritrade Holding Corp.: http://www.amtd.com