Asset management is a great business, given that the stock market has historically risen by a 9.1% CAGR since 1871.

In other words, the assets from which management fees are derived are generally rising, allowing for exponential growth in earnings and cash flow – the building blocks of any great dividend growth stock.

Of course, those same giant pools of money can create conflicts of interest between management and shareholders, in which employees of the company end up trying to enrich themselves with the kinds of giant bonuses that Wall Street has become legendary for.

This is why shareholders need to be very selective, only buying shares of time-tested, shareholder-friendly asset managers, such as T. Rowe Price.

With a dividend yield nearly 50% above its long-term average and a forward P/E multiple of just 15.1, TROW’s stock could be a timely opportunity to consider.

Let’s take a closer look at this venerable dividend aristocrat, which has 30 consecutive years of growing dividends under its belt, to see if T. Rowe Price is an appealing long-term investment for a diversified dividend growth portfolio.

Business Description

Founded in 1937 in Baltimore, Maryland, T. Rowe Price Group is one of the world’s largest investment managers with offices in 17 countries on four continents.

The company uses fundamental and quantitative analysis to create and manage equity and bond mutual funds, which have historically beaten their indexes and thus attracted consistent inflows of investor money.

Today T. Rowe Price has a record $813 billion in assets under management (AUM), having marked net asset inflows of $2.2 billion in the first three quarters of 2016.

Stock and blended asset portfolios account for 77% of T. Rowe Price’s total asset mix, with fixed income portfolios accounting for the remaining 23%. U.S. mutual funds account for 64% of the firm’s assets.

Business Analysis

As you can see, the track record of actively managed funds beating their benchmarks over the long-term is downright abysmal. This explains the rising popularity of passive investing, such as index funds and exchange traded funds (ETFs).

T. Rowe Price (TROW)

Fortunately, T. Rowe Price is one of the few investment managers that has actually earn its fees, with 81%, 84%, 82%, and 88% of its mutual funds beating their benchmarks over the last one, three, five, and 10 years, respectively.

Not surprisingly, the majority of T. Rowe Price’s mutual funds are rated four or five stars by Morningstar, well above the industry’s averages.

T. Rowe Price TROW Dividend Aristocrat

Source: T. Rowe Price Investor Presentation

This kind of impressive outperformance makes T. Rowe Price one of the most trusted and respected names in asset management, giving it a wide moat that insulates it from most of its competitors.

Better yet, with about two-thirds of its AUM tied up in retirement and annuity funds, the company’s asset base is less prone to volatile asset outflows. This creates more stable fee revenue, earnings, and cash flow with which to pay investors a generous and highly secure dividend (more on this later).

In recent years, T. Rowe Price has been able to further widen its competitive advantage by launching a series of target date retirement funds. These are funds that automatically re-adjust asset allocation between bonds and stocks based on the changing risk-tolerance of a client who will need to retire by a certain date.

In fact, over the past five years T. Rowe Price has seen its target date fund AUM triple from $60 billion to $178 billion (22% of firm-wide AUM), according to Morningstar.

With the rapid aging of the U.S. population and growing concerns about retirement security, analysts expect retirement dated funds to become increasingly popular. T. Rowe Price is well-positioned to benefit from this trend.

Thanks to its strong track record created by a long-term performance focus and excellent brand equity, T. Rowe Price has been able to record net asset inflows in 30 of its last 40 quarters, resulting in steadily growing revenue, earnings, and free cash flow (FCF).

T. Rowe Price TROW Dividend Aristocrat

Source: Simply Safe Dividends

T. Rowe Price TROW Dividend Aristocrat

Source: Simply Safe Dividends

T. Rowe Price TROW Dividend Aristocrat

Source: Simply Safe Dividends

Management’s impressive balancing act between attracting and retaining top fund manager talent, while avoiding the kind of obscene compensation seen elsewhere on Wall Street, has helped the company generate strong, consistent, and growing margins during this time. T. Rowe Price’s strong profitability is also helped by the recurring revenue its business enjoys and its relatively low capital requirements (the company’s core asset is its research team).

T. Rowe Price TROW Dividend Aristocrat

Source: Simply Safe Dividends

T. Rowe Price TROW Dividend Aristocrat

Source: Simply Safe Dividends

In fact, compared to its peers, T. Rowe Price generates far better margins and returns on investor capital, showing the superiority of its unique management style.

Company Operating margin Net Margin FCF Margin Return On Assets Return On Equity Return On Invested Capital
T. Rowe Price 38.8% 26.7% 23.8% 18.6% 23.5% 23.5%
Industry Average 23.4% 15.8% NA 1.1% 9.1% NA

Source: Morningstar

Rather than having a single person calling the shots, T. Rowe Price has a management committee that collectively guides, implements, and reviews major policy changes and initiatives. This further reduces the company’s business risk profile.

Combined with a deep bench made up some of the best and most experienced money managers in finance, this creates a very stable and enduring investor-friendly corporate culture.

In fact, from 2011 through 2015, T. Rowe Price paid out 96% of EPS to shareholders in buybacks and dividends. The company has proven itself extremely dedicated to long-term shareholder wealth creation.

Key Risks

While T. Rowe Price has proven itself an excellent long-term dividend growth stock, there are a few risks to be aware of.

First, a large part of its fees are based on daily AUM, which means that financial results can be lumpy, especially during times of negative market volatility. The company does not do well during bear markets.

In addition, over the past few years T. Rowe Price’s rate of organic AUM growth (net inflows) has slowed:

T. Rowe Price TROW Dividend Aristocrat

The decrease in growth is due to T. Rowe Price’s sheer size (the biggest institutional investors have concentration limits in any given fund) and the

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