T. Rowe Price Stock: Attractive Valuation and Dividend Yield (NASDAQ:TROW)

0

RiverNorthPhotography

T. Rowe Price Group, Inc. (NASDAQ: TROW) is one of my favorite asset managers. Most of the others I like are private companies, like Vanguard and Fidelity. However, TROW is publicly traded, which allows small investors to own shares of a successful company in the asset management industry.

Asset manager stocks have been hit hard during the 2022 bear market as earnings and profitability are tied to stock prices. TROW stock price is down nearly 39% year-to-date at the time of this writing. But the stock’s historic declines during bear markets are well known. Either way, TROW is attractively priced, trading below its decade average P/E ratio, and now yielding 4%+. The combination does not happen often. Additionally, TROW is a well-known aristocrat and dividend champion. Therefore, I view TROW as a long-term buy.

Preview by T. Rowe Price

T. Rowe Price was founded in 1937 and is based in Baltimore, Maryland. The company operates globally, with offices in major financial centers around the world. The company provides pension plans, mutual funds and sub-advisory services to retail investors and institutions. TROW offers equity, fixed income, and multi-asset funds, but primarily focuses on equity funds. Additionally, the firm recently acquired Oak Hill Associates, expanding into alternative strategies and private markets. TROW had approximately $1.4 trillion in assets under management (AUM) at the end of May 2022. Total revenue was approximately $7,708 million in the last twelve months and approximately $7,672 million in 2021.

OHA to Become T. Rowe Price's Private Markets Platform

T price. Rowe

Growth of TROW

TROW has significantly increased its revenue and earnings per share over the past decade, underscoring its success as a pension-focused asset manager. Revenue more than doubled from approximately $3.02 billion to approximately $7.71 billion, while diluted adjusted EPS more than tripled from $3.20 in 2012 to $12.75 in 2021. Notably, revenue grew despite industry-wide fee compression.

Chart

Portfolio overview

Over the past 5 years, revenues have grown at a compound annual growth rate of 12.4%. [CAGR], while EPS grew faster at a CAGR of 21.8%. Over the past decade, revenue grew at a CAGR of 10.8%, while EPS grew at a CAGR of 15.9%. You have to go back to the subprime mortgage crisis for consistent declines on both.

TROW has grown in part over longer periods of time through successful mutual funds that perform better than their peers and benchmarks. Retail and institutional investors are attracted to performing funds. The combination of a bull market and better fund performance is a powerful force to increase assets under management and therefore revenues and profits.

Year-to-year fluctuations are not as important as long-term performance, where TROW excels. Over the five and ten years, the majority of the company’s funds have outperformed the Morningstar median, passive peer median and their benchmarks. For example, over the past five years, 64% of TROW’s equity funds have performed better than the Morningstar median, 55% have performed better than the passive peer median, and 59% have performed better than their benchmarks. Moreover, equity funds are doing even better after ten years.

Table

T price. Rowe

In particular, multi-asset funds are the best performers. TROW has a significant presence in retirement plans, and many workers are drawn to target date funds and multi-sector funds for their simplicity.

Dividend analysis

TROW is a well-known dividend growth stock and a favorite among investors. The dividend yield is currently 4% and above, and according to Dividend Radar, the company has increased the dividend for 36 consecutive years. Therefore, the stock is a dividend aristocrat and a dividend contender.

The forward dividend yield is currently approximately 4.04%, based on an annual dividend rate of $4.80 per share. The yield is about the highest in a decade, but dividend safety has not been sacrificed. In fact, the security of dividends is exceptional, as we will see below.

Dividend Yield History

Portfolio overview

The mix of dividend yield and growth makes the stock attractive to investors. TROW last increased the quarterly dividend in February 2022 to $1.20 from $1.08 per share. The rolling dividend growth rate is consistently in the double digits and was around 15.6% CAGR over the past five years and around 13.3% over the past decade.

Moreover, TROW did not significantly increase the payout ratio to achieve such high growth rates. The relatively conservative payout ratio of around 48% likely means further double-digit increases in the future. However, investors should remember that in years when the market is underperforming, dividend growth may slow, but is generally better in bull markets.

Chart

Portfolio overview

TROW has always had excellent dividend security based on earnings, free cash flow (FCF), and balance sheet.

Consensus estimates for fiscal year 2022 for TROW are $9.98 per share and the dividend is $4.80 per share. These numbers produce a payout ratio of approximately 48%. Our cut-off payout ratio is 65%, which means TROW’s dividend is safe with a decent buffer. It is important to note that this payout ratio corresponds to a bear market and a decline in assets under management. During a bull market and an increase in assets under management, revenues and profits are generally higher and the payout ratio is lower.

TROW had approximately $3.326 million in FCF over the past 12 months. The dividend required approximately $1,029 million, giving a dividend/FCF ratio of approximately 31%. This value is well below our 70% threshold, meaning there is little risk of a dividend cut based on FCF.

The company is known for its fortress balance sheet. It is one of the few companies that does not have any debts. At the end of the first quarter of 2022, TROW had no short or long term debt. The company had approximately $1,998 million in cash and cash equivalents and $2,879 million in investments. Therefore, debt is not a risk to the security of dividends.

Evaluation

TROW stock price has been penalized in 2022 due to the sensitivity of revenue and earnings to market movements. As a result, the stock price tends to be more volatile than the broader market, with a beta of around 1.33 over the past year. As a result, the stock price fell more than the S&P 500 index and the Nasdaq. However, the company has strong dividend and yield prospects. TROW’s forward earnings multiple is around 11.9 times, which is lower than its range over the past five and ten years.

Consensus analyst earnings for 2022 are now $9.98 per share. We will use 14X as a reasonable value for the payout multiple. This value is lower than the average of the last five years and the last decade. However, we factor in higher beta and industry-affecting fee compression.

Our fair value estimate is $139.72. The current stock price is around $116.63, suggesting the stock is undervalued based on earnings.

By applying a sensitivity analysis using price/earnings ratios between 13X and 15X, we obtain a fair value range of $129.74 to $149.70. Thus, the current stock price is about 78% to about 90% of the reasonable value estimate.

Current valuation estimate based on P/E ratio

P/E ratio

13

14

15

Estimated value

$129.74

$139.72

$149.70

% of estimated value at current stock price

90%

83%

78%

Source: dividendpower.org calculations.

How does this analysis compare to other valuation models? A finbox multiple EV/EBITDA analysis yields a fair value estimate of $169.88 per share. The model assumes a direct multiple of 9.9X. Portfolio Insight’s blended fair value model taking into account the P/E ratio and dividend yield yields a fair value of $158.12 per share. We do not use Gordon’s growth model here due to high dividend growth rates.

The average of these three models is around $155.91, suggesting that TROW is undervalued at the current price.

Final Thoughts

TROW is a popular dividend growth stock to own. The combination of consistent double-digit dividend growth rates and dividend security is attractive. Plus, investors tend to like a great debt-free balance sheet. In contrast, investors must tolerate higher beta and volatility than the broader market, as earnings and EPS are sensitive to stock market movements. But when the markets reverse, TROW often does well. The stock is now undervalued. I view TROW as a long-term buy.

Share.

About Author

Comments are closed.