T. Rowe Price (TROW) is one of the best financial stocks to own in any environment. The company has a strong balance sheet and an attractive margin profile. The company had $1.7 trillion in assets under management at the end of 2021 and a history of consistent growth in assets under management. The shares sold off over 30%, falling from over $220 to around $140. The valuation is attractive, with a current price/earnings ratio of 11.3x. The dividend yield is 3.4% and the company has a 35 year streak of increasing the dividend and it has also repurchased shares. The biggest question mark for TROW will be the overall market performance. Strong market performance over the past two years has been a tailwind for TROW and its AUM. Weak market performance could be a problem for the company, but I think the risk/reward ratio is favorable to investors at current prices.
TROW is a large asset management firm headquartered in Baltimore. While ARK was the toast of Wall Street in 2020 (and is now the scapegoat), TROW has earned a solid reputation from a long track record of outperforming peer funds.
The primary driver of TROW’s bottom line will be AUM growth. I think they are likely to see continued growth for AUM. The biggest question mark relates to market conditions that could negatively impact AUM growth for TROW. The company has a strong balance sheet and margins that are a sign of a high quality business.
The company has plenty of cash ($1.5B) and no long-term debt on the balance sheet, which is certainly an exception to the rule in the current interest rate environment. For 2021, the company had a net profit margin above 40%. There aren’t many companies with rock-solid balance sheets and high-margin businesses like TROW, and the valuation is attractive after the sell-off of the past three months.
TROW shares had a fantastic run after the COVID crash, peaking four months ago just above $220. The valuation was starting to get a bit rich, but after selling over 30%, the shares are attractively valued. TROW has a weighted price to earnings of 11.3x, which is well below the normal multiple of 20x. I think the fair value is at least 15 times earnings, which would lead to double digit returns from here.
The biggest question mark for TROW will be based on what is happening in the overall market. Earnings trended up and right, but there was a decent drop in the 2008/2009 recession. If the markets sell off and impact TROW’s AUM, earnings may decline. However, with the current valuation, I believe the risk/reward profile is tilted to the upside. Another reason investors are getting excited is TROW’s capital return program.
Dividends and redemptions
TROW is a dividend aristocrat, with 35 consecutive years of dividend increases. Dividend increases are not negligible either. They constantly increased it at a double-digit rate. When you combine dividend growth with a 3.4% yield, you get an attractive mix of current yield and dividend growth. They repurchased $1.1 billion (2.6%) of their stock in 2021. My guess is that they will continue to repurchase stock, especially after the recent selloff. Based on the operating history, investors are likely expecting continued dividend growth and more redemptions over the next two years.
The past two years have been a difficult environment for investors trying to find companies at a reasonable value. Some scum has started to emerge from certain areas of the market, but valuations for the broader market are still elevated. At 11.3 times earnings and a 3.4% return, TROW is not one of those stocks. The company has a long history of dividend growth and has bought back shares at a decent rate. The biggest uncertainty is what will happen with the broader markets, but I think TROW is ready for anything with its balance sheet. Earnings could be hit if the AUM declines due to weaker markets, but investors can still count on TROW’s dividend increases to continue for a long time. Investors looking to buy the dip on TROW are likely to see double-digit returns from here.
I would be fascinated to hear your thoughts. Feel free to leave a comment below.