2023-06-05 00:29:41 ET
Summary
- T. Rowe Price receives a Hold rating based on a 5-step scoring system, with a score of 3.
- TROW stock is slightly overvalued and lacks revenue diversity, but has a healthy capital position, a competitive dividend yield, and is currently in a bearish price range.
- Risks to this outlook include drastic changes in client net inflows and outflows, overall equity market trends, and competition in the mutual fund sector.
Summary
Today, I am rating a global asset management firm with $1.35B in AUM, roots going back to 1937, and a major player in the mutual fund space as well as a large advisory business.
That firm's name?
None other than Baltimore's own T. Rowe Price ( TROW ).
For its rating, I am using a 5-step scoring system based on the following 5 questions:
- Is the stock currently undervalued?
- Is the firm's revenue well diversified across multiple business segments?
- Is the stock's dividend yield competitive with stocks in the same sector?
- Is the firm in a healthy capital position to withstand financial shocks?
- Does the current price trend present a buying opportunity?
For each "yes" answer a score of 1 is given. A total score ranges as follows: (0: Strong Sell, 1: Sell, 2: Hold, 3: Hold, 4: Buy, 5: Strong Buy).
In my analysis, this stock scored a 3 , giving it a Hold rating , and below I will present evidence to support this. This is based on the stock being overvalued, and lacking enough revenue diversity. Its positives are a competitive dividend yield, a continuous bearish price range, and healthy capital position.
Overvalued at the Current Price
First, let's take a look at this stock's current P/B Ratio as of June 3rd, as shown in Seeking Alpha .
T.Rowe Price - P/B Ratio (Seeking Alpha)
This stock's P/B ratio scored a D- from Seeking Alpha, and at a P/B of 2.75 it appears to be somewhat overvalued. Further, its forward P/B is 182% higher than the sector average.
Therefore, the answer to whether it is currently undervalued is clearly No .
In comparison with other financial sector stocks, there are more value opportunities with some of its sector peers. Goldman Sachs ( GS ) has a P/B ratio of 1.0 , Morgan Stanley's ( MS ) P/B ratio is 1.49, while State Street ( STT ) has a P/B of 1.01 .
In the above example, I would say Goldman and State Street present the best value.
My approach to using P/B ratios for valuation was also shared by a staff article in The Street on May 27:
A high multiple might indicate overvaluation, while a ratio closer to 1 could be viewed as cheap.
Revenue Diversification Needs Improving
Next, let's look at how diversified this firm's revenue streams are across multiple business segments. We are using its Q1 2023 results as a reference.
T.Rowe Price - Q1 2023 Results - Revenue by Business Segment (T.Rowe Price)
When looking at how this firm makes its revenue, based on its own info above, just over 90% of its revenue comes from "investment advisory fees", while only around 8.3% comes from administration/distribution/servicing fees.
With all three segments' revenue in decline YoY in this most recent quarterly result, all contributing to the 17.5% decline in overall YoY net revenue shown above, my concern is that so much of revenue comes from their advisory segment.
In their results commentary for Q1, the firm mentioned that revenue from lower advisory fees "was primarily driven by a mix shift toward lower-fee asset classes as a result of overall market declines and net outflows over the last 12 months."
Whether this firm's revenue is diversified enough is therefore a No .
My focus on revenue diversification was also echoed by Forbes personal finance contributor Melissa Houston in a March 2021 article:
Recent economic events have shown us how important it is to diversify revenue and not be dependent on just one source of income.
Sustainable businesses require a strong framework that both drives revenue and stands the test of time, especially in the face of poor economic climates.
A Competitive Dividend Yield
Is this stock's dividend yield competitive within the same sector? Let's take a closer look, using Seeking Alpha dividend info :
Investors could take advantage of the upcoming ex-date of June 14 to earn the next dividend of $1.22 per share.
Further, this stock has shown respectable dividend growth in the last 5 years:
By comparison to some peers, its dividend yield is above that of Charles Schwab ( SCHW ) which is 1.84%, despite that being a very attractive stock as well. Schwab also is in the business of asset management, managing large mutual funds, as well as having an advisory business too, among other things, and has a retail brokerage segment and its own bank, which T. Rowe Price does not have.
The dividend yield for another financial sector giant, State Street, is currently at 3.52% , and that of Morgan Stanley sits at 3.68% . When it comes to Morgan Stanley, it has additional revenue streams from investment banking and M&A, as well as its retail brokerage, eTrade, and Morgan Stanley Bank.
Among this set of peers, T. Rowe Price's dividend yield of 4.40% wins over them, however.
So, the answer to whether its dividend yield is competitive is Yes .
Although dividend-income investing is not a strategy for all investors, it can be a recurring quarterly income generator for an income-driven portfolio. From a forward looking view, there is no indication that this stock will cut dividends any time the next few quarters.
Rather, as echoed by fellow Seeking Alpha analyst Gen Alpha in a recent article, "the company's dividend yield of 4.4% and steady capital returns to shareholders make it a compelling total return story."
A Solid Capital Position
Unlike some of the big banks I covered recently, which list their CET1 ratios and Tier 1 capital, among other things, this firm is not a bank but primarily an asset manager and advisor, so it presents its capital situation differently as you see below from their Q1 presentation:
T.Rowe Price - Q1 2023 results - Capital Management (T.Rowe Price)
Based on their own info, I see that their cash position has improved YoY, and in the last 36 months they remain committed to returning capital back to shareholders through dividends and share repurchases. And, we already discussed how their dividend is attractive and has grown in the last few years.
So, yes , I think the firm has a healthy capital position.
A Closer Look at Current Price Trend
Now, when looking at the 2 year price chart below and the closing price on Friday June 2, overlaid by the 50 day simple moving average (dark blue line) and 200 day simple moving average (dark red line), we get the following:
T.Rowe Price - 2 Year Price Chart (Street Smart Edge trading platform)
As in recent articles, I am using chart indicators called the golden cross and death cross, which are known to be lagging indicators of bearish or bullish price trends. The chart shows a death cross forming around January 2022, signaling the start of an extended downward price trend.
Although a golden cross looked like it might form in January 2023, the 50 day average was only "hugging" the 200 day it seems, rather than crossing above it.
As of market close on June 2, it is uncertain whether a golden cross will form soon, just by looking at this chart. While the 50 day average remains below the 200 day at this time, however, it could still present a buying price range.
So, I would say that in terms of just the chart itself, yes it is still in a buying range for now.
Risks to my Outlook
My hold rating for this stock could be affected by a few key risks to this outlook: whether client net inflows and outflows change drastically as well as whether overall equity markets see a major bull run or a longer bearish period for the rest of 2023. This is because overall market values affect the values of the assets that T. Rowe manages, and makes money from managing.
If the firm sees positive net inflows along with rising markets in the next few quarters, it could make my Hold rating overly cautious right now. However, the stock could also dip into Sell territory if massive net outflows and a bearish market this year causes investors to pull out of this stock even more.
Asset managers like this are heavily affected by client flows, so that is a key indicator to keep an eye on going forward.
This firm also has competition in the mutual fund sector to deal with. Schwab, Fidelity Investments, and Vanguard Funds all offer a plethora of equity and bond funds just like T. Rowe Price does... and nowadays moving unparked cash into mutual funds has become a matter of just a few clicks with your mouse.
What is not a risk, however, is the same type of "bank run" scenario we saw with failed regional banks this spring, since this firm is not a bank for consumer deposits, much less a regional bank, nor is exposed to let's say the same type of risks that Silicon Valley Bank and First Republic Bank were exposed to, despite all three being in the financial sector. This is why we have to treat each firm individually and not lump them into the same crab pot.
Conclusion
In conclusion, I reiterate my Hold rating for this stock as it scored a 3 in my 5-step analysis. This rating is based on its healthy capital position, dividend yield, and current price trend... offset by a P/B ratio showing it to be slightly overvalued, and a lack of enough revenue diversity as it is heavily reliant on advisory fees.
This otherwise longstanding and established firm in the financial sector has strong potential, and an investor may consider keeping it in their portfolio for the time being.
For further details see:
T. Rowe Price Stuck In A Holding Pattern, With Still Plenty Of Fuel