TROW is Better, but Not Good Enough…

T. Rowe Price Group is a global asset management firm. The company provides diversified products and services like sub-advisory services and separate account management to individuals, advisors, institutions, financial intermediaries, and retirement plan sponsors.

It sells a wide range of financial products and services like mutual funds, investment products, sub-advisory, separate account management, recordkeeping, and related services. Investment advisory fee accounts for the majority of revenue, which is calculated as a percentage of assets under management.

T. Rowe has a diversified geographic footprint serving clients in 49 countries like the U.S., UK, Hong Kong, Japan, Singapore, and Australia. By geography, the U.S. is its largest market accounting for more than 60% of the net flows, followed by APAC region (29%) and EMEA (9%). With more than $1.1 trillion of assets under management, the firm manages a diverse and balanced asset class comprising of U.S. equity (48% of total assets in 2018), multi-asset (30%), U.S. fixed income (12%) and international equity (8%) and international fixed income (2%).

Investment Data

Revenue Growth & Market Exposure

With over 80 years in business, T. Rowe has developed a deep knowledge of the financial industry. The company is recognized for its high quality and research driven investment capabilities and for providing a robust approach to risk management. T. Rowe’s management team is highly experienced and have invested in all kinds of markets over the years. More than 80% of its mutual funds have outperformed the Lipper average over the last decade. Its institutional investment offering has also exhibited strong investment performance over the years.

T. Rowe has a well-diversified and sticky client base consisting of individuals, financial advisors, institutions, financial intermediaries, and retirement plan sponsors. The firm has gained a deep understanding of its clients’ needs given its rich experience. It has now become a preferred global partner, especially for retirement oriented investors. T. Rowe’s retirement offering has higher client retention, as the customers in this segment typically look for stable as well as trustworthy partners. T. Rowe’s new client acquisition and strong client retention have resulted in improved net new flows in 2018. It is also investing in digital transformations to enhance the client experience and improve overall operational efficiency.

A stable balance sheet, expertise across all asset classes and strong client focus are the company’s biggest strengths. T. Rowe Price is well positioned to benefit from the growing financial needs of its clients. It has plans to expand through the introduction of new products as well as geographically. The company has been making sustained progress on strategic priorities to strengthen its core business and has already launched 25 new vehicles for its existing strategies.

Dividends

T. Rowe Price has raised its dividend for 33 years in a row, making it a Dividend Aristocrat. Its latest dividend payout represents an 8.5% increase over the previous annual dividend payment. The firm has returned nearly 100% of its net income to shareholders in the form of dividends and share repurchases in the last year.

T. Rowe has maintained a solid payout ratio of 41% on average over the last five years. It sports an annual average yield of 2.75% currently. The company also has a share repurchase program and recently approved a 10 million share increase in the company’s share repurchase plan. T. Rowe has a sound performance track record across all asset classes when compared to its peers and benchmarks. Its earnings have also grown at more than 14% CAGR over the last decade. With a payout ratio of 39% and an impressive dividend CAGR of 11% over the last decade, investors can expect a mid-to-high single-digit dividend hike over the coming years.

The company is targeting 1%-3% organic AUM growth over time which should also support future dividend growth. Moreover, T. Rowe is expanding its global reach and is growing its cash flows successfully across fixed income, international equity, and multi-asset segments. It is also focusing on active investment management and a range of income-oriented investment capabilities to attract the shifting demand from the equity asset class. T. Rowe is in a good position to take advantage of attractive growth opportunities and invest in key capabilities.

Competition

The financial services industry is highly competitive. T. Rowe competes with brokerage and investment banking firms, insurance companies, banks, mutual funds, hedge funds, and other financial companies. The company also faces increased competition from passive oriented investment strategies.

T. Rowe Price is a low cost leader with its average fees being lower than peers. It enjoys a strong reputation in the financial services industry. Its ability to offer a superior range of investment strategies across multiple asset classes helps it better serve clients globally.

Bottom Line

T. Rowe has a payout ratio of around 40% and an impressive dividend CAGR of 11% over the last decade. The firm has steadily grown its assets under management over the years and looks in a good position to keep growing its earnings in the high single-digit range. Investors can, therefore, expect a mid-to-high single-digit dividend growth rate over the coming years.

The yield is decent but the performance isn’t on par with the S&P500 and that’s a pass for me.

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