A few years ago, T. Rowe Price Group Inc. (TROW, Financial) joined the exalted ranks of the S&P 500 Dividend Aristocrats®, a small group of companies that have increased their dividends for at least 25 consecutive years.
The share price of this investment management firm has declined since the beginning of 2015, breaking what had been a fairly steady upward march since 2010. This 3-year chart shows the pullback:
So what are we to make of this investment blueblood: Is it reasonably-valued or under-valued?
History
1937: Investment firm founded by Thomas Rowe Price, Jr., in Baltimore, MD.
1950: The company launches its first mutual fund, the T. Rowe Price Growth Stock Fund.
1951: First institutional client account opened.
1960: Expansion into U.S. small-cap equities.
1969: New Era Fund, a fund focused on natural resources, launches.
1974: Introduces the first retirement accounts in the U.S.
1986: Goes public on NASDAQ as TROW.
1987: Established a research office in Hong Kong, and followed up with offices in Buenos Aires and Singapore.
2000: The corporate holding company structure established.
2003: Created target-date retirement funds.
History based on information found at Wikipedia.org and the company’s 10-K for 2015.
TROW’s Business
T. Rowe Price calls itself, “a financial services holding company that provides global investment management services through its subsidiaries to individual and institutional investors in the sponsored T. Rowe Price mutual funds distributed in the United States and other investment portfolios.” (Unless otherwise noted, the information in this article comes from TROW’s 10-K for 2015.)
It goes on to say, “These other investment portfolios include separately managed accounts, subadvised funds and other sponsored investment portfolios, including collective investment trusts, target-date retirement trusts, Luxembourg-based funds offered to investors outside the United States and portfolios offered through variable annuity life insurance plans in the U.S.”
Breaking some of that out, we get
- A financial services holding company;
- Provides global investment management services;
- It operates through subsidiaries;
- Some subsidiaries take care of individual investors;
- Other subsidiaries work with institutional investors;
- All operate through sponsored TROW mutual funds.
Comments: An asset management company that operates one of the world’s biggest mutual fund portfolios, for both individual and institutional investors.
Revenues
In its 10-K, T. Rowe Price says most of its revenues come from one source,
“We derive the vast majority of our consolidated net revenue and net income from investment advisory services provided by our subsidiaries, primarily T. Rowe Price Associates and T. Rowe Price International Ltd.”
It also notes that those revenues fluctuate with the financial markets and its asset allocation at any given time,
“Our revenues depend largely on the total value and composition of assets under our management. Accordingly, fluctuations in financial markets and in the composition of assets under management impact our revenues and results of operations. At December 31, 2015, we had $763.1 billion in assets under management, including $487.1 billion in the Price Funds and $276.0 billion in other investment portfolios.”
This table from the 10-K shows a breakout of that revenue:
In its Midyear 2016 Market Outlook, in June, the company said it expected, “modest revenue and earnings growth” for the full fiscal year.
Comments: As the table above shows, TROW increased its operating revenue in 2015, but not its non-operating revenue. And although its net income declined, earnings per share did edge up. Looks like more of the same for this year.
Competition
In its operations, T. Rowe Price faces what it calls “substantial competition”. That competition comes from many, traditional sources, including:
- other investment management firms
- broker-dealers
- mutual fund companies
- banks, and insurance companies.
It also faces competition from less-traditional sources: passive and index oriented investment providers. As we know, ETFs have been a growing force in the investment community, because their fees are often significantly lower than mutual funds.
Hoovers lists TROW’s main competitors as FMR LLC (Fidelity Investments), The Vanguard Group Inc. and American Century Companies Inc. Another, smaller, competitor is WHG, which I previously profiled in the article, Triple Screen Winner: Westwood Holding Group.
Other publicly-traded competitors include Janus Capital Group Inc. (NYSE:JNS) and Franklin Resources Inc. (NYSE:BEN).
Comments: T. Rowe Price is one of the giants of the investment industry and must compete with other major asset managers, including Fidelity and Vanguard.
Moat
One of the advantages of being a big company is that it can provide financial muscle. In its 10-K, the company says, “Our substantial liquidity and resources also allow us to take advantage of attractive growth opportunities; invest in key capabilities . . . and . . . provide our clients with strong investment management expertise and service. . . .”
It has a diversified asset base, with some ability to shift part of that ‘substantial liquidity’ from market to market, according to conditions. With holdings in domestic and international, as well as equities and debt vehicles, it has options that might not be available to other players.
Size also gives it the opportunity to place its people in key locations around the world and in every significant market. And, the company has almost eight decades of experience in the financial world, giving it a corporate purpose that’s well grounded in experience.
Of course, the other major fund players have some of these advantages as well.
Comments: T. Rowe Price is a big company with financial and human resources that allow it stake a claim to a big piece of the market, both domestically and internationally.
Growth
This chart shows how the company’s revenue has recovered since the recent financial crisis:
It has used that revenue well, with good growth in its earnings:
Earnings per share (EPS) growth has averaged 13.70% per year for the five years and based on the Midyear 2016 Market Outlook, it seems likely the company should deliver more of the same.
With a rapidly growing middle class in much of the developing world, it is well positioned to, in its words, “broaden our distribution reach globally”.
We note as well that TROW has shown robust dividend growth over the past five years: an average of 13.50% per year and the share buyback ratio over five years has averaged 3.12%.
Comments: Between the growth of its EPS and its dividend, this company has been good to its shareholders. With no debt and well developed plans for the future, TROW should continue to grow robustly in the future.
Other
T. Rowe Price is incorporated in Maryland and based in Baltimore, MD.
Chief Executive Officer (and president): William J. Stromberg, CFA, age 56. Previously, he served as director of Global Equity Research from 2004 through 2015. He has been with the company for 29 years. (based on information provided at Reuters.com)
At December 31, 2015, the company employed 6,000 associates, an increase of 2.2% from the number employed at the end of 2014.
Year-end is December 31.
Ownership
Eleven of the gurus followed by GuruFocus own shares in T. Rowe Price. The largest holding belongs to Bill Nygren (Trades, Portfolio), with 2,447,000 shares. Jeremy Grantham (Trades, Portfolio) and John Rogers (Trades, Portfolio) have the second and third largest holdings.
Here’s how GuruFocus sums up ownership in TROW:
Institutional owners have a solid stake in the company, with more than three-quarters of total shares outstanding. Insiders are also strong, at almost 7%, and the shorts have a relatively low stake, at just under 4%.
Comments: A good mix of ownership, with the biggest piece held by institutional investors (which should reduce price volatility); insiders have enough to presume their interests are aligned with shareholders and the shorts do not have enough to concern us.
TROW by the Numbers
Comments: TROW has a market cap of $17.25-billion, its price is roughly midway between its 52-week high and low, a strong ROE, a respectable dividend and it bought back more than 4% of its shares last year.
Financial Strength
T. Rowe Price receives impressive 9s for its Financial Strength and its Profitability & Growth:
We note, first, that the company has no long-term debt and that its Return on Invested Capital (ROIC) is more than 2.5 times its Weighted Average Cost of Capital (WACC).
Skipping to the next column, the red icon at the top alerts us to the fact TROW’s margins are not what they were, but still are strong and compare favorably with the rest of the industry.
It also posts strong results down the rest of the column, from ROE to EPS growth, double-digit all the way except for Greenblatt’s ROC, which is triple-digit.
Looking ahead, there are reasons to believe TROW can maintain its position in the industry. In The 2016 Nintai Charitable Trust Portfolio: Annual Review, Thomas Macpherson writes, “With around 57% of its AUM held in retirement accounts and variable-annuity investment portfolios, the firm has a far stickier set of assets than its peers and benefits from a nearly constant flow of capital into these funds.”
He adds, “T Rowe Price has some of the best governance in the investment management space.”
And, we cannot overlook the message of financial strength given off by its dividend history. It joined the ranks of the S&P 500 Dividend Aristocrats® by increasing its dividend every year for 29 years (25 consecutive years of increases needed to qualify for the list). In addition, it receives a coveted A+ rating, which refers to, “The ability of management to maintain stable or increasing dividends indicates the quality of a firm’s earnings and its growth prospects.”
Comments: No debt, strong metrics across the board and an excellent management team should give us confidence in T. Rowe Price’s ability to maintain its financial strength.
Valuations
Here is the valuation advice GuruFocus provides, “T. Rowe Price Group Inc is more suitable for Earning Power Based valuation methods. This includes 1) Median P/S Value 2) Peter Lynch Fair Value. The Median P/S Value of T. Rowe Price Group Inc for today is 97.44. The Peter Lynch Fair Value of T. Rowe Price Group Inc for today is 47.68.”
The DCF Fair Value Calculator gives us a price that’s practically the same as the market price:
Turning to P/E (Price/Earnings) ratios, we see TROW’s has drifted slightly downward over the past five years, after spiking in the wake of the recent financial crisis:
Its current P/E of 16.65 is very close to the industry median. GuruFocus says, “NAS:TROW's P/E Ratio(ttm) is ranked lower than 51% of the 967 Companies in the Global Asset Management industry. (Industry Median: 16.39 vs. NAS:TROW: 16.68)”
The PEG ratio currently sits at 1.19, which puts it at the low end of the fair-value range (stocks with a PEG of less than 1.0 are considered under-valued, stocks between 1.0 and 1.99 are considered fair-valued, and those above 2.0 are considered over-valued).
At this level, the valuation is getting back into what appears to be a ‘normal’ range:
Finally, let’s take a look at a price chart again, this time of the past five years, to observe the pullback:
Comments: Most of the indicators we see suggest TROW is fairly valued, however, the price chart would suggest something of a bargain.
Conclusion
Whether T. Rowe Price Group Inc. is fairly-valued or a bargain, we have not taken into account its status as a Dividend Aristocrat. In this age, where income seekers have to go into the equities market, a solid performer with a decent yield—like TROW—probably should trade higher (although I defer to the judgement of Mr. Market).
Considering the rising EPS, the solid dividend with a high probability of continuing increases and share buybacks, this company will be attractive to anyone who wants to invest for growth and income. It will, however, be less attractive to investors seeking a significant discount or margin of safety.
Disclosure: I do not own shares in any of the companies listed in this article, nor do I expect to buy any in the foreseeable future.
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