T. Rowe Price Group (TROW, Financial), the $16 billion asset manager, delivered its fourth-quarter and 2016 annual results last week. T. Rowe Price grew its sales by 0.5% to $4.2 billion for the full year and lost 1.4% in profits to $1.19 billion. The company shares fell 5.3% while the broader Standard & Poor's 500 index had minor -0.07% change.
In review, T. Rowe Price experienced increased operating expenses to 8.2%, which mostly reduced the asset manager’s bottom line for the fiscal year.
William J. Stromberg, the company's president and CEO, provided enlightening commentary:
"U.S. stocks advanced sharply in the fourth quarter of 2016, lifting major indexes to record highs and resulting in strong full-year gains for many investors. Economic growth finished 2016 on a strong note and investors grew more optimistic that the incoming administration and Congress will succeed in reducing regulations and taxes. International equity markets delivered positive but less strong results, held back by a strengthening U.S. dollar. Fixed-income returns suffered in the quarter as interest rates rose following the U.S. elections. Full-year returns, though, were solid, led by high-yield and emerging market bonds.
"We experienced net cash outflows for the fourth quarter and the year, largely as a result of clients reallocating from active U.S. equity strategies to passive products. The trend to passive has been persistent and has accelerated in recent years. We cannot predict when it will reach a new equilibrium. Over the long term, though, we expect well-executed active management to play an important ongoing role for investors and we are reinvesting in our company with the objective of sustaining the strong investment and service results we have historically achieved for our clients.
"As we invest to strengthen our company for the long term, we have continued to return cash to stockholders in the near term paying $541 million of dividends and investing $677 million to repurchase 4% of our shares in 2016. Over the past three years, we have returned a total of $4.1 billion to stockholders in dividends and share repurchases, more than 110% of our net earnings over this period of time.
"This is a time of significant change in the asset management industry, and we are responding by investing to strengthen our long-term value proposition to our clients and to our stockholders. We believe that delivering excellent long-term net investment performance to our clients with outstanding service and support will lead to attractive stockholder returns over time."
Performance
Since January, T. Rowe Price has underperformed the S&P 500 index with -11.3% return and 1.95%. On a five-year basis, the asset manager had total returns of 6.05% compared the index’s 13.9%, according to Morningstar data.
Valuations
According to GuruFocus data, T. Rowe Price had a trailing price-earnings (P/E) ratio of 15 times (industry median of 14.4), price-book (P/B) ratio of 3.3 times (industry median of 1) and price-sales (P/S) ratio of 4 times (industry median of 6.9).
The 80-year-old fund investment firm has also been known as a Dividend Aristocrat. To be part of the Dividend Aristocrat list, companies should be able to consistently grow their dividends for the past 25 years.
Meanwhile, T. Rowe Price had a trailing dividend yield of 3.24% and a 48% payout ratio and 0.9% share buyback ratio.
T. Rowe Price
In its filing, T. Rowe Price Group is 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 U.S. and other investment portfolios.
T. Rowe Price derives the vast majority of its consolidated net revenue and net income from investment advisory services provided by its subsidiaries, primarily T. Rowe Price Associates and T. Rowe Price International Ltd.
The asset manager’s revenues depend largely on the total value and composition of assets under management. Accordingly, fluctuations in financial markets and in the composition of assets under management impact our revenues and results of operations.
Assets under management
(10-K and Press Release, T. Rowe Price)
Contrary to the outflow that has been observed in other asset managers, such as the recent $13 billion outflow Europe’s Aberdeen Asset Management experienced, T. Rowe Price seemed to carry on, even growing its total assets under management by 10.8% on a five-year average.
T. Rowe Price’s assets under management are accumulated from a diversified client base across four primary distribution channels: third-party financial intermediaries that distribute T. Rowe Price’s managed investment portfolios in the U.S. and other countries (more than 45% of total assets under management as of 2015); individual U.S. investors on a direct basis; U.S. defined contribution retirement plans; and institutional investors globally.
The assets T. Rowe Price manages include a broad range of U.S. and international stocks, blended assets, bonds and money market mutual funds and other investment portfolios that are designed to meet the varied and changing needs and objectives of individual and institutional investors.
(10-K and Press Release, T. Rowe Price)
T. Rowe Price’s business sales can further be broken down into three parts: investment advisory fees, administrative fees and distribution and servicing fees.
Investment advisory fees
These are revenues earned from the Price Funds that are determined daily based on the net assets managed in each fund.
According to company filings, T. Rowe Price’s investment advisory fees typically are calculated as a percentage of the market value of the assets under management. The asset manager generally earns higher fees on assets invested in its equity funds and equity investment portfolios than on assets invested in its fixed income funds and portfolios.
As of December, T. Rowe Price had 55.6%, or $450.6 billion, of its total assets under management in equity asset class compared to 57.6%, or $439.4 billion, the year prior. Investment advisory fees, meanwhile, grew 1.1% and contributed 88.3%, or $3.73 billion, in total sales for T. Rowe Price in fiscal 2016.
Administrative fees
T. Rowe Price’s subsidiaries provide advisory-related administrative services to the Price Funds and their shareholders. T. Rowe Price Services provides mutual fund transfer agency and shareholder services including maintenance of staff, facilities, technology and other equipment to respond to inquiries from fund shareholders.
Administrative fees were lower by 2.6% and contributed 8.6%, or $352.5 million, to total sales in 2016.
Distribution and servicing fees
According to T. Rowe Price, the investor class of all Price Funds can be purchased in the U.S. on a no-load basis without a sales commission or 12b-1 fee.
No-load mutual fund shares offer investors a low-cost and relatively easy method of directly investing in a variety of stock and fixed-income portfolios.
T. Rowe Price also added an I-Class share to a number of its Price Funds in 2015. The I-Class shares are designed to meet the needs of institutionally oriented clients who seek investment products with lower shareholder servicing costs and lower expense ratios.
In 2016, distribution and servicing fees fell by 6.5% to $141.7 million, or 3.4% of total T. Rowe Price sales for the period.
Overall, T. Rowe Price had five-year sales and profit growth and operating margin averages of 9.1%, 9.7% and 45.2% (2).
Cash, debt and book value
As of December, T. Rowe Price had $1.2 billion in cash and cash equivalents and remained debt-free for the past decade; 10.7% of the asset manager’s $6.23 billion assets are goodwill having a book value of $5 billion compared to $4.76 billion the year earlier (1).
Cash flow
(Press Release, T. Rowe Price)
Unaudited figures found in the recent press release indicated that T. Rowe Price cash flow from operations had lowered by 12.2% compared to the year prior. Subtracting the $148 million in additions to property and equipment gave T. Rowe Price a free cash flow of $1.2 billion compared to $1.36 billion in 2015.
(Morningstar and Press Release)
T. Rowe Price also provided 102%, or $1.2 billion, of its free cash flow in dividends and share repurchases as the company had an average shareholder payout of 109% in the past three years.
Conclusion
T. Rowe Price exhibited solid balance sheet and continuous exemplary performance despite ongoing industry challenges. Similar to other bigger competitors, such as BlackRock (BLK, Financial) and Vanguard, T. Rowe Price did not suffer losses in its assets under management but demonstrated growth instead.
Meanwhile, the slowdown in sales and profit generation has been ongoing since 2015. T. Rowe Price logged its first drop in profits, by 0.54%, in that year followed by the recent fiscal year’s -5.3%.
Nonetheless, the company seemed to be determined to keep its high-profile – Dividend Aristocrat – status despite industry challenges.
Meanwhile, UBS upgraded T. Rowe Price shares to buy from neutral in November and raised its price target to $82 per share from $66. Deutsche Bank, on the other hand, reiterated a hold on the asset manager’s shares but also raised its target price to $74 from $71 per share in September.
(T. Rowe Price at $66.4 per share with trailing P/E ratio of 15.2 times, GuruFocus data)
Historical growth and earnings multiple accompanied by a 20% margin gave a value of $77 a share.
In summary, T. Rowe Price is a buy with $75 per share target price.
Notes
(1) Me: Book value was retrieved by deducting total liabilities and redeemable noncontrolling assets found on T. Rowe Price’s recent press release.
Read: T. Rowe Price Press Release
(2) Morningstar data and recent press release.
Disclosure: I have shares in BlackRock and am contemplating purchasing T. Rowe Price, too.
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