Brian Rogers’ semi-annual letter to T. Rowe Price Equity Income Fund shareholders for the period ended June 30, 2015.

Highlights

  • The equity market turned in its weakest first-half showing since 2010 as investors focused on slowing corporate earnings growth and the expectation that the Fed would begin to raise interest rates later this year.
  • Fund performance was slightly negative during the six-month period ended June 30, 2015, as fears of rising interest rates put pressure on fixed income securities and dividend-paying stocks.
  • Our energy stocks were disappointing, with oil prices continuing to slide. However, the portfolio’s financial and health care positions, and other key holdings, benefited results.
  • With equity valuations neutral at best, we have modest expectations for stock price gains in the second half of the year.

Fellow Shareholders

The equity market advanced only slightly in the first half of 2015, its weakest first-half showing since 2010. Investors focused on slowing corporate earnings growth and the expectation that the Fed would begin to raise interest rates later this year. These concerns had an impact on fixed income markets and stocks paying good dividends, which declined as long-term rates rose slightly. In addition, worries about Greece, the eurozone, and the Chinese economy subdued investor sentiment. After six years of stock price gains, investors were content to take a breather.

T. Rowe Price Equity Income Fund

Dividends accounted for the bulk of the S&P 500 Index’s return during the first half of the year. The T. Rowe Price Equity Income Fund returned -1.59% during the six-month period ended June 30, 2015, compared with 1.23% for the S&P 500 Index and -0.62% for the Lipper Equity Income Funds Index. (Returns for the Advisor and R Class shares are also shown and reflect their different fee structures.) Weakness in fixed income, which affected higher-yielding stocks, took a toll on fund results during the period. In addition, our holdingsin the energy sector, which declined sharply as oil prices remained volatile, trimmed fund performance.

T. Rowe Price Equity Income Fund – Dividend Distribution

On June 26, 2015, your Board of Trustees declared a second quarter dividend of $0.17 per share for shareholders of record on the same date, bringing the year-to-date dividend distributions to $0.28 per share. You should have received your check or statement reflecting this most recent distribution. (Distributions for the Advisor and R Class shares were different.)

T. Rowe Price Equity Income Fund – Portfolio Review

From the beginning of the year to the end of June, there was not much overall movement in equity prices, which masked the dramatic volatility in individual stocks and throughout sectors over the six-month period. As fixed income markets weakened, the electric utility sector was notably weak, with most companies posting price declines in excess of 10%. Oil stocks continued to lose ground, with the sector off almost 5% in the first half.

Financials and other sectors performed better, and two of our holdings, JPMorgan Chase and GE, which had underperformed in 2014, contributed positively to fund results in the first half. Other portfolio holdings, such as Vulcan Materials, Boeing, Harris, Stanley Black & Decker, Walt Disney, Bristol-Myers Squibb, and Pfizer, were profitable investments. Our disappointments included several energy stocks—Apache, Chevron, and Royal Dutch Shell among them. American Express struggled through the period. A few technology holdings, which included Qualcomm and Corning, also detracted from performance. (Please refer to the fund’s portfolio of investments for a complete list of holdings and the amount each represents in the portfolio.)

T. Rowe Price Equity Income Fund

The Major Portfolio Changes table shows that we invested in companies that have the characteristics we like to see in our portfolio.

Occidental Petroleum, Las Vegas Sands, and Canadian Natural Resources are examples of firms that have been out of favor and exhibit contrarian appeal. Their recent price declines have created opportunities to initiate positions in solid companies with undervalued stocks. Their dividend yields are attractive, and we believe their share prices do not reflect the underlying value of the companies.

T. Rowe Price Equity Income Fund

Regarding our sales, we eliminated Quest Diagnostics and Apple, and we reduced our exposure to Murphy Oil. Both Quest Diagnostics and Apple had performed well for us, and they advanced to the point where we felt that other investment opportunities were more attractive.

T. Rowe Price Equity Income Fund – Outlook

We expect steady, albeit modest, economic growth in the second half of the year. Earnings growth should be similarly modest as the impact of lower oil prices and the strong U.S. dollar should continue to weigh on S&P 500 earnings. While record corporate profit margins have had a positive effect on earnings, we believe that there will be some downward pressure on margins as the economy continues to grow and cost pressures rise. Investors continue to focus on every statement from the Federal Reserve, which is suggesting that it is likely to raise rates sometime in the second half. The Fed will evaluate both global economic conditions and the underlying tone of the U.S. economy as it considers its next move. With equity valuations neutral at best, we have modest expectations for stock price gains in the second half of the year. As always, we hope to be pleasantly surprised if our expectations are exceeded.

In closing, we announced last year that John Linehan would succeed me as Equity Income Fund portfolio manager on November 1, 2015. Consequently, this will be my last shareholder report to you. John and I have been working together closely to ensure a smooth transition.

November 1 will be the 30th anniversary of the introduction of the Equity Income Fund, and it has been an honor for me to work for you during the past three decades. I have every confidence that John will do an outstanding job in the years ahead.

Respectfully submitted,

Brian Rogers

President of the fund and chairman of its Investment Advisory Committee

July 20, 2015

The committee chairman has day-to-day responsibility for managing the portfolio and works with committee members in developing and executing the fund’s investment program.