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E*TRADE to remain independent as online brokerage seeks organic growth

E*TRADE Financial Corp. is staying independent, for at least a bit longer.

The online retail brokerage's board does not plan to immediately pursue a deal to sell the company in light of the conclusion of its two-year review, said Executive Chairman Rodger Lawson, who added that the company has created "confidence" among its directors around its future growth.

Wall Street has long speculated that E*TRADE could be a takeover target for rivals such as Charles Schwab Corp. or TD Ameritrade Holding Corp., especially after the company's board introduced a series of performance goals for its newly minted management team in 2016. Those goals were tied to net new account growth, derivatives as a percent of daily average revenue trades, managed product balances and net new asset growth. E*TRADE met each of the board's goals, other than net new asset growth.

"Two years on, the company has clearly reinvigorated its growth and delivered outstanding returns," Lawson said Oct. 18 during an earnings conference call. "I don't think there's anything we need to be ashamed of. I'm not going to jump out of the window because we didn't hit our net new asset flows"

As E*TRADE turns its attention to its independent future, the company's board will be looking for growth in EPS and return on equity. E*TRADE is specifically targeting midteens EPS growth that would roughly double its earnings power by 2023 and an expansion in its operating margin to 50% in 2020 from its current 48% level, with the intention of reaching the mid-50s by 2023. The company is also looking to swell its return on equity from its current level of about 16% to above 20%.

The company plans to reach those targets through both buybacks and dividends, CEO Karl Roessner said. On Oct. 17, E*TRADE unveiled a $1 billion share repurchase program and a 14 cents-per-share dividend.

E*TRADE's decision to remain independent comes as commission prices continue to fall across the retail trading industry, putting pressure on the likes of Schwab, TD Ameritrade, Fidelity Investments and E*TRADE.

The newest entrant into the field, JPMorgan Chase & Co., revealed in August that its retail investing platform will offer 100 free stock and exchange-traded fund trades to customers in their first year. After that, customers will have to pay $2.95 per trade, $4 less than E*TRADE's current $6.95 commission rate for equity trades. The move was largely heralded by analysts as a potential catalyst for further fee cuts.

E*TRADE CFO and COO Michael Pizzi said the company is structured to handle some "modest contraction" to commissions per trade. Average commission per trade fell to $7.04 in E*TRADE's third quarter from $7.76 a year earlier, while its daily average revenue trades climbed 29% year over year.

Still, amid mounting pricing pressures, E*TRADE's executive chairman does not believe the board's position will change around its growth strategy.

E*TRADE has managed to grow over the last few years in a way that Lawson equated to "Lazarus rising from the dead." The executive chairman said E*TRADE's board would be open to some acquisition offers, but that he believes the newly set goals will yield higher returns.

"We would look at [an offer] very seriously," Lawson said. "We remain conscious of the fact that [we are] the smallest player in a highly competitive environment. We have little room for failure."