Published October 25th, 2016 by Bob Ciura
T. Rowe Price Group (TROW) was founded in 1937 by Thomas Rowe Price, Jr. Today, the company has a market cap of $16.6 billion and manages over $770 billion in assets. It now has more than 6,000 associates in 16 offices worldwide.
The company provides mutual funds, advisory services, and separately managed accounts for individuals, institutional investors, retirement plans, and financial intermediaries.
T. Rowe Price has grown into a massive, global financial institution by abiding to its founder’s key principles. Three of these principles are to:
- Put clients’ interests first
- Act with accountability
- Be disciplined and risk-aware.
These values have helped T. Rowe Price greatly enrich its shareholders over the past several decades. The company is a Dividend Aristocrat, and has raised its dividend for the past 30 years.
There are only 50 Dividend Aristocrats; stocks with 25+ years of consecutive dividend increases in the S&P 500. You can see the full list of Dividend Aristocrats here.
Keep reading this article to learn more about the investment prospects of T. Rowe Price Group.
Another of T. Rowe Price’s guiding principles is to invest in its employees, which it considers its most valuable assets.
Indeed, it is critical for a financial services company to have qualified experts in the financial industry.
Source: 2015 Annual Report, page 15
The strategy worked for the company, as T. Rowe Price significantly grew revenue and operating profit from 2011-2015.In that period, the company’s net revenue and net profit grew by 53% and 58%, respectively.
Note: Fellow asset management Dividend Aristocrat Franklin Resources follows a similar strategy of investing heavily in the best financial professionals it can find.
Source: 2015 Annual Report, page 22
The biggest reasons for T. Rowe Price’s impressive growth in that time was the strong performance of the stock market. The S&P 500 and other global markets rose significantly in the aftermath of the Great Recession, which naturally resulted in a significant rise in assets under management.
However, the business environment has become more challenged for T. Rowe Price in recent periods. Last year, net income declined 1%.
Management attributed this weakness to investor worries over the slowing Chinese economy, as well as the sharp drop in commodity prices.
These difficulties have persisted in 2016. Over the first half of the year, the company suffered a 3% drop in average assets under management, investment advisory fees, and net revenue. This resulted in a 20% decline in earnings-per-share in the same time.
The major factors impacting the company this year pertain to geopolitical risk. The summer Brexit vote resulted in significantly heightened geopolitical risk. In addition, the U.S. election raises the level of uncertainty in the markets.
Rising uncertainty adversely impacts financial services firms, as it has caused fund outflows and worsening investment performance.
Investing in asset management companies is a bit like taking a leveraged bet on the direction of the market. When the market is rising, well-run asset management firms prosper. Asset prices rise resulting in greater management fees. More investors catch ‘bull mania’ and invest, which also increases assets under management. When markets full, the reverse occurs.
Going forward, T. Rowe Price will need to resume growth in net assets under management and advisory fees. This will be difficult in the near term, but long-term, the effects of the Brexit and U.S. elections should fade with time.
In addition, a rise in interest rates could be a boost to T. Rowe Price’s earnings power. The company has virtually no debt and $2.8 billion of cash and fund investment holdings. T. Rowe Price has returned some of its excess balance sheet cash to investors, including a $2 per share special dividend last year.
Higher interest rates could increase the amount of interest income the company earns on its balance sheet cash.
Over the long-term, the company’s strong reputation in its industry should allow it to continue growing earnings. A reasonable expectation for future earnings-per-share growth is 7%-9% per year.
Competitive Advantages & Recession Performance
T. Rowe’s competitive advantage comes from its trusted name and brand reputation in the mutual fund industry. T. Rowe makes the bulk of its earnings from mutual fund fees.
This makes T. Rowe’s ability to outperform rival mutual funds important for the company to sustain its brand. Either a fund performs well or it doesn’t. When T. Rowe’s funds outperform rivals, they attract new funds. When they don’t, the reverse occurs.
That’s why the company focuses on attracting the best talent it can in the finance industry. The company’s brand based competitive advantage helps its earnings to grow quickly during bull market,s but it struggles during recessions.
T. Rowe saw earnings-per-share fall during the Great Recession of 2007 to 2009, as one would expect from an asset management company.
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
- 2011 Earnings-per-share of $2.92 (new high)
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, then again in 2011.
Valuation & Expected Total Returns
T. Rowe Price is valued modestly. The stock trades for a price-to-earnings ratio of 16.1. This compares favorably to the S&P 500 Index, which has a price-to-earnings ratio of 24.7.
This indicates that T. Rowe Price is undervalued relative to the market, particularly since the company is growing earnings at an above-average rate.
Investors are likely to see modest valuation multiple expansion, in addition to expected earnings growth. In addition, the stock pays a dividend yield of 3.2% at its current share price. T. Rowe Price’s current dividend yield significantly exceeds the 2% average dividend yield of the S&P 500.
If the company grows earnings-per-share by 7%-9% per year, total returns would reach 10.2%-12.2% when including the dividend. This calculation does not account for changes in the valuation multiple.
Given its cheap valuation, double-digit annualized returns are possible for T. Rowe Price stock.
T. Rowe Price is encountering difficulties over the past year, which has impacted its financial performance. But investors who buy the stock now could be rewarded for their patience.
T. Rowe Price is a unique blend of a stock with an above-average current yield as well as strong dividend growth. It typically increases its dividend at rates that beat inflation, such as its 4% dividend increase in 2016.
As a result, the stock appeals to investors who desire current income as well as dividend growth. T. Rowe Price Group ranks in the top 25% of stocks with 25+ years of steady or rising dividends using The 8 Rules of Dividend Investing. The company’s solid yield and growth expectations, and fairly low price-to-earnings ratio help the company to rank well – and make it a good long-term hold for investors looking for exposure to the financial sector.