Investment Highlights

  • Shares price has cooled over the last year and is now neither expensive or cheap on a price-earnings basis
  • Consistent growth in sales and cash flow make T. Rowe Price a good stock for investors with low risk tolerance that do not want volatility in their investments
  • Shares pay a respectable 2% yield and the company regularly returns cash to shareholders through its buyback program

T. Rowe Price (TROW) is one of the largest and well known asset managers with $731 billion in assets under management and provides investment services to individuals and institutional investors. The company offers a range of investment funds with more than half (57%) of assets held in retirement accounts and variable-annuity portfolios. This means that assets under management is relatively stable since investors do not tend to move around retirement money like they do other investment portfolios.

Target-date retirement products have been a strong source of growth lately as investors try to lock in their retirement needs with new investment funds. The firm only books about 10% of its assets from international clients so could see growth outside the United States in the years to come.

The company has been rumored to be participating in the newest funding round for on-demand ride service Uber which could raise around $1 billion. Participation as an early-stage investor could pay off big for T. Rowe Price if Uber is able to eventually issue publicly-traded shares. That kind of a windfall could lead to a special dividend or a big jump in the stock’s value if T. Rowe Price secures a big enough stake in the company.

The asset management group of stocks is not particularly exciting for most investors because sales and earnings tend to be fairly stable. Sales and cash flow growth have remained consistent for the company over different time periods and should continue along the same rate into the future. While this means that the shares will probably not surge higher, they will also be supported on reliable growth even when the rest of the market weakens.

Fundamentals

Sales have grown at a relatively consistent rate over several time periods while slightly higher growth in operating income points to good cost control by management. The balance sheet is not as helpful in determining financial health as it is with other companies. As a financial company, T. Rowe Price does not hold long-term debt and current liabilities are limited.

Shares have underperformed the rest of the market over the last year with a gain of just 5.9% over the last twelve months though the stock surged over the prior two years. The recent performance is likely just a short-term function of investors waiting for the fundamentals to catch up to the share price.

Dividends and Growth

T. Rowe Price is not a stellar dividend payer though it does offer a 2% yield, slightly lower than the 2.3% average yield over the last five years. The payout ratio has fallen to 40% of income from the five-year average of 48% so leaves some room for dividend growth.

The company has increased its dividend for 27 consecutive years, every year since it began issuing a dividend in 1986 and also regularly returns cash through a share repurchase program.

More than $214 million was returned to shareholders over the last year through the repurchase program, bringing the total return to $661 million along with the dividend. The board of directors recently increased the buyback authorization by 15 million shares to a total of 20.9 million shares authorized for repurchase. This could mean a potential $1.8 billion back in shareholders’ pockets.

Management has increased the dividend by a compound annual rate of 18.6% over the last five years and should be able to keep this strong pace going forward on an increase to the payout ratio and an aggressive share repurchase program.

Valuation

Shares are trading in-line with the industry average at 19.5 times trailing earnings but well under the company’s own five-year average multiple of 23.6 times earnings. Earnings are expected 8% higher next year to $4.87 per share on similar revenue growth. I would normally get uneasy about a stock trading at nearly 20 times earnings but the consistency of growth for T. Rowe Price seems to support a little higher valuation.

It would be difficult to make the case that shares of T. Rowe Price were cheap but I do not see them as particularly expensive either. People will soon be making New Year’s resolutions and better financial health follows only physical health as the most oft-made resolution. That could mean an increase in assets for companies like T. Rowe Price as people put more money to retirement funds and investments in general. I like the stock on its consistent sales growth and performance over the last decade.

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