2023-08-03 15:11:08 ET
Summary
- T. Rowe Price is a good value for income and growth, offering a stable dividend and potential for double-digit total returns.
- The company reported a decent quarter, with net revenue growing by 6.4% YoY and strong performance in its target date franchise.
- TROW is expanding into the alternative asset management space and has a fortress balance sheet with plenty of cash on hand for capital returns.
There’s gold to be had in the stock markets, so much so that even Morningstar uses that word to describe 5-star rated funds and ETFs. With everyone chasing gold, sometimes it’s easier to take a step back and buy pick and shovel plays that help you to make money in others’ pursuit of wealth.
Such is the case with asset managers like the leading player, T. Rowe Price ( TROW ). TROW remains in its own bear market, having reaching $220 near the end of 2021, despite the broader stock index having largely rebounded.
I last covered TROW here back in June, highlighting its potential comeback, and the stock hasn’t disappointed, giving investors an 8.5% total return, well surpassing the 5.4% rise in the S&P 500 ( SPY ) over the same time. In this article, I provide an update and discuss why the stock remains good value for income and growth.
Why TROW?
T. Rowe Price is one of the oldest companies that’s still on the market today, having been founded in 1937. It currently serves clients in 51 countries, offering comprehensive exposure to equities, fixed income, blended, and target-date retirement funds.
TROW recently reported an overall decent quarter, with net revenue growing by 6.4% YoY to $1.6 billion. This was driven in large part to stronger equity market performance during the second quarter. TROW’s funds also outperformed their peers, with the U.S. large-cap and blue chip growth funds beating their benchmarks, while the large-cap value gave back some gains after starting strong earlier in the year.
Also encouraging, TROW’s target date franchise delivered a strong quarter, with all of its flagship retirement funds ranking in the top quartile of their peer group. Target date products had a net inflow of $2.4 billion during the quarter. However, TROW did see $20 billion worth of net client outflows on an overall basis during Q2, driven by sales and redemption pattern that the firm saw in the first quarter. This was due to clients remaining wary around equities with memories of the 2022-fallout being fresh in memory despite the recent market rebound.
Risks to TROW include the fact that the equity market rebound is narrowly tied to a relatively small number of mega-cap tech stocks, while the rest of the market remains rather ho-hum in performance. As such, a material downturn in those stocks with an outsized influence over the market can negatively affect TROW’s AUM and fee income.
Looking ahead, I believe that near-term headwinds around investor sentiment should pass and that the broader equity market (rather than just the top names) could rally considering that the risk of a recession is now considered to be low. This is supported by a recent report by Goldman Sachs ( GS ), estimating that the probability of a U.S. recession over the next 12 months has declined from 35% to 25%, noting “growth in the U.S. is also getting a sizable boost from a recovery in real disposable income and stabilization in the housing market.”
Moreover, TROW is also developing strategies to expand into the attractive alternative asset management space, a segment that Blackstone and Ares Management have thrived in. This was reflected by management’s comments during the recent earnings call :
We finalized the seed commitment for our first joint co-branded product with OHA, T. Rowe Price OHA Select Private Credit Fund, or OCredit, and closed for our business development company, or BDC, election filing on June 30. The filing is a key legal milestone for the launch, which is planned for later this year. We also hired a Head of U.S. Intermediary Alternative Sales and we'll continue to invest in resources and expertise to support this effort.
Meanwhile, TROW stands out for having a fortress balance sheet, with $2.2 billion in cash on hand and just $28 million worth of long-term debt, $323 million of capital leases, and $95 million of other non-current liabilities. With virtually no other stakeholders in the company beside shareholders, TROW can focus more of its capital towards dividends and buybacks. As shown below, TROW has retired 9.2% of its outstanding float over the past 5 years alone.
It also currently yields a healthy 4.1% that’s supported by a 66% payout ratio, a 5-year dividend CAGR of 14%, and TROW is a dividend aristocrat with 36 years of consecutive growth under its belt. While the quarterly dividend grew by just $0.02 earlier this year, growth could pick back up after the equity market normalizes with a slowdown in inflation.
Lastly, TROW is reasonably attractive at the current price of $118.53 with a forward PE of 16.4, sitting below its normal PE of 19.5. While analysts expect low single digit EPS growth over the next couple of years, that could change with a shift in the markets, and TROW has seen 8 upward analyst EPS revisions over the past 9 quarters. Even if TROW returns to just a PE of 18, investors could see double digit total returns in the teens.
Investor Takeaway
I think T. Rowe Price remains a good value for income and growth, offering investors a stable dividend that’s supported by a solid payout ratio and plenty of cash on hand to continue paying out dividends and buying back stock. The stock is attractively priced at the current price with potential to move higher if the markets normalize and risk appetite increases, leading to a rise in its AUM in my view. With a competitive and evolving product lineup that includes alternative assets, TROW should continue to remain a solid choice for investors looking for potentially strong long-term returns.
For further details see:
T. Rowe Price: Buy This Undervalued Dividend Aristocrat