T. Rowe Price Group, Inc. (TROW) is a publicly owned asset management holding company. The firm provides its services to individuals, institutional investors, retirement plans, financial intermediaries, and institutions. T. Rowe Price Group is a dividend champion, which has raised dividends for 29 years in a row.
The most recent dividend increase was in February 2015, when the Board of Directors approved an 18.20% increase in the quarterly dividend to 52 cents/share.
The company’s largest competitors include Blackrock (BLK), Vanguard and Fidelity.
Over the past decade this dividend growth stock has delivered an annualized total return of 12.80% to its shareholders. Future returns will be dependent on growth in earnings and starting dividend yields obtained by shareholders.
The company has managed to deliver a 13.70% average increase in annual EPS over the past decade. T. Rowe Price Group is expected to earn $4.85 per share in 2015 and $5.38 per share in 2016. In comparison, the company earned $4.55/share in 2014.
Overall I am bullish on asset managers, who have the odds stacked in their favor for future success. Essentially, the goal of the game is to get as much in assets under management, and then try to have low costs relative to competitors. As a large portion of customers stay with a manager, this generates fees for years to come.
Since asset prices tend to rise over time, asset managers who earn a fixed fee based on amount of money they manage are destined to earn more as well. This would not be a smooth ride up, but nevertheless the rising tide is destined to lift all boats up. Even if stock markets end going up by 6 - 7% in price annually for the next 2 - 3 decades, those asset managers are going to earn 6-7% more per year merely because they manage those assets. As long as the amount redeemed equal amount of new money invested, the asset manager will earn more money for shareholders simply for being there.
It is a pretty sweet model after all, where if you come up with a mutual fund idea and raise hundreds of millions from investors, you get to earn an annuity like income stream, as long as asset levels are at least maintained. There is no risk for the manager, and the risk is borne by investors in the funds.
Of course, if those asset managers also find ways to market their products and receive more in inflows from investors, their earnings per share could grow much faster than overall profits from other US sectors.
The main problem behind mutual fund companies and asset managers is the rise in passive investing approaches, which have been popularized by Vanguard. It is tough to compete against an organization which runs its passively managed funds at cost, thus minimizing expenses for shareholders in those funds. However, I do believe that not all assets will end up in index funds, although the competition will much tougher than before. However, even the passively managed index funds are not a panacea for the ordinary mom and pop investor, who needs some guidance for managing their retirement money. From my personal experience , ordinary investors tend to focus on their jobs and lives, and are not very focused on investing decisions. This is why it is quite possible that traditional asset managers who manage to reach to those individuals, and sell relevant investment products that generate recurring revenues to them, will benefit.
It is very easy to buy and sell an investment these days, which makes "asset stickiness" a potential problem. This is why I like the fact that T.Rowe Price has over half of funds held in retirement accounts and variable annuity accounts. Those are pretty sticky account holders. However, many individuals who buy an investment such as a mutual fund, tend to hold on to that investment for years. In addition, fewer individuals have company pensions, which means that they would have to manage their own money, or otherwise risk not retiring. This is why professionally managed money will still be around, and earn fees for decades to come.
The annual dividend payment has increased by 16% per year over the past decade, which is much higher than the growth in EPS. Future growth in dividends will be much lower than that however, and will be limited by the growth in earnings per share.
A 16% growth in distributions translates into the dividend payment doubling every four and a half years on average. If we check the dividend history, going as far back as 1989, we could see that T. Rowe Price has managed to double dividends almost every four and a half years on average.
In the past decade, the dividend payout ratio has increased from 31% in 2005 to 38.70% by 2014. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.
T. Rowe Price Group has also managed to generate a high return on equity, which stands at around 23% in 2014. You can see that this indicator is affected by stock market declines in the short-run. I generally like seeing a high return on equity, which is also relatively stable over time.
Currently, T. Rowe Price Group is attractively valued at 18.20 times forward earnings and yields 2.50%. I recently initiated a position in the company. I am hoping to slowly build my position in the stock.
Full Disclosure: Long TROW
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