Dividend Aristocrats Part 44: T Rowe Price Group Inc (TROW) by Ben Reynolds, Sure Dividend
T Rowe Price Group (TROW) was founded in 1937. Today, the company has a market cap of $16.3 billion and manages over $700 billion in assets.
The company provides mutual funds, advisory services, and separately managed accounts for individuals, institutional investors, retirement plans, and financial intermediaries.
T Rowe Price Group is one of only asset management companies in the Dividend Aristocrats index. The other is Franklin Resources (BEN).
Clint Carlson's hedge fund, Carlson Capital's Double Black Diamond strategy, gained 1.04% net of fees in the month of September. Following this performance, the fund has returned 9.87% net of fees for the year to the end of the month. Q3 2021 hedge fund letters, conferences and more The Double Black Diamond strategy makes up Read More
This article analyzes T. Rowe Price Group’s dividend, competitive advantage, total return potential, valuation, and recession performance in the sections below…
T Rowe Price Group has paid increasing dividends for 29 consecutive years. The company’s latest dividend increase (in February of 2015) was for 18.2%.
The image below shows T. Rowe Price Group’s dividend history since 1989:
This dividend history does not include special dividends. In 2015, T Rowe Price Group paid a special dividend of $2.00 per share. This move highlights the shareholder friendly nature of T Rowe Price Group’s management.
T Rowe Price Group currently has a dividend yield of 3.2% and a payout ratio of 46%. The company’s above average yield and fairly conservative payout ratio bode well for both current income and potential future dividend increases.
The company’s historical dividend yield is shown in the image below:
As you can see, now is historically the best time to buy T Rowe Price Group stock (based on its dividend yield) since the Great Recession. T Rowe Price Group stock has only traded for a dividend yield above 3% in the early nineties, briefly in 2002, and during the Great Recession.
T Rowe’s competitive advantage comes from its trusted name in the mutual fund industry. The company generates the majority of its earnings from mutual fund fees.
As a result, outperformance compared to its peers is critical for the company to continue marketing its mutual funds.
The company has outperformed its peers based on Lipper mutual fund averages. The percentage of the company’s mutual funds that have outperformed over various time frames is shown below:
- 1 Year: 71%
- 5 Year: 77%
- 10 Year: 88%
The company’s competitive mutual fund products have helped it reach its massive scale. T Rowe Price Group’s investing know-how combined with their well-known brand form the company’s competitive advantage.
Future Growth Prospects & Total Return Potential
Investing in asset management companies is similar to taking a leveraged bet on the market.
When markets are rising, asset management companies see new capital inflows (people want to participate in the bull market) and growing account values from current clients as equity values increase. This results in rapidly growing investment management fees during bull markets.
On the other hand, when markets are falling, investors want to pull out of the market (selling at the worst possible time – but history has shown that’s how most investors behave). This reduces the asset management company’s investment management fees. At the same time, the account values of investors who remain invested falls as equity values decline. Since most asset management fees are based on a percentage of assets under management, asset management fees decline significantly.
Over the last decade, T Rowe Price Group has compounded its earnings-per-share at 10.2% a year.
The financial landscape is slowly shifting. Investors are switching to ETFs – which offer much lower investment management fees than mutual funds. To illustrate this point, take a look at T Rowe Price Group’s growth fund (PRGFX) has an annual expense ratio of 0.68%. For comparison, the iShares S&P Growth ETF (IVW) has an expense ratio of 0.18%.
With the financial industry slowly trending toward lower asset under management fees, I believe T Rowe Price Group’s earnings-per-share growth will slow somewhat over the next decade as compared to the previous decade. I expect long-term earnings-per-share growth of 7% to 9% a year from the company. I expect the stock market to continue generating 9% returns (over the long run), and expect fee reductions to be partially (or completely) offset by market share gains and share repurchases at T Rowe Price Group. This is how I derive the expected 7% to 9% earnings-per-share growth for the company going forward
This growth combined with the company’s current 3.2% dividend yield gives investors expected total returns of 10.2% to 12.2% a year going forward.
T Rowe saw earnings-per-share fall during the Great Recession of 2007 to 2009, as one would expect from an asset management company.
To the company’s credit, earnings-per-share remained positive throughout the recession. T Rowe Price Group quickly rebounded. The company reached new highs in earnings-per-share by 2010.
The company’s earnings-per-share per share throughout the Great Recession and the first year of recovery are listed below to give you a better idea of the company’s performance through that time.
- 2007 Earnings-per-share of $2.40 (new high)
- 2008 Earnings-per-share of $1.82 (start of declines)
- 2009 Earnings-per-share of $1.65 (recession low)
- 2010 Earnings-per-share of $2.53 (new high)
As you can see, T Rowe Price Group remained profitable through the Great Recession. The company saw steep earnings-per-share declines, but quickly recovered to new highs by 2010.
T Rowe Price Group is currently trading for a price-to-earnings ratio of 14.2 (using adjusted earnings). The company is trading at a sizable discount to the S&P 500 – which currently has a price-to-earnings ratio of 19.9
Additionally, T Rowe Price Group is trading around its highest dividend yield since the Great Recession.
It is a rare opportunity to be able to pick up shares of T Rowe Price Group for yields greater than 3%.
I believe a fair price-to-earnings ratio for T Rowe Price Group is in line with the S&P 500 (if not a bit higher). The company appears to be undervalued – especially considering its shareholder friendly management and high expected total returns.
T Rowe Price Group has a long dividend history and a very shareholder friendly management. On top of that, the company appears to be a bargain at current prices.
The downside to T Rowe Price Group is the slow shift toward lower fees in the asset management business. This could put downward pressure on the company’s margins over the long run.
Additionally, the company’s stock tends to drop precipitously during bear markets. With rising interest rates and a slowing global economy, a potential new recession could provide an even better entry point into T Rowe Price Group.
Overall, T Rowe Price Group currently has an above average ranking using The 8 Rules of Dividend Investing. What holds the company back from ranking higher is its high stock price standard deviation of 39.8% – which reflects the company’s weakness during recessions.