T. Rowe Price Group, Inc. is a publicly owned investment manager. The firm provides its services to individuals, institutional investors, retirement plans, financial intermediaries, and institutions. It launches and manages equity and fixed income mutual funds. T. Rowe Price is currently managing about 1.7 trillion dollars in assets.
Market Cap: $33.3b
Current situation…
TROW is beaten down very sadly and also luckily for us as long-term investors. It is down by 24% in this year. There are generally companies that are going down in value and stock price because they are overrated. But by TROW there is also the problem that because they are an investment bank, their assets under management are going down as well.
So their Book Value is starting to decrease. Besides that, TROW did have impressive earnings during this latest quarter. Their total revenue has increased by 23% last year and the financial statement says that it has always increased over the last 5 years. Sadly, due to inflation, the adjusted operating expenses jumped by 15% last year.
Although the price is down if you invested into TROW 20 years ago then you made a very decent 12% yearly return only just on the stock price appreciation. As you can see on the chart since 2021 January the stock price went above the orange line which represents the instinct value/margin of the safety line. Right now it is again in the very good territory to buy TROW at a discount price.
From the dividend standpoint…
The 4-year average dividend yield on this stock is 2.7%, they paid an extra one-time 3$/share extra dividend last year. Right now the current div. yield is 3.32% which is just insane compared to the average yield. Only this fact moves my mind to buy from them more.
If you want to take your stake from T.RowePrice then your chance is here! Buy the stock before 14.03.2022 which is the ex-dividend date of TROW and you will receive two weeks later this juicy dividend yield!
The payout ratio has to be under 75% in my opinion. Under 75% is the healthy number for a payout ratio. In this way, they will be able to manage their dividends for the long term. By TROW this number was always under 50% compared with adjusted earnings. Share buybacks can be a silent killer for your investment.
If a company is issuing shares over and over again then your slice of the cake will be diluted. So we are looking for share buybacks and not the other way around. TROW makes also here a very good job and they diligently buy back shares every year.
TROW has a record of 35 years of dividend-paying and increasing. This increase is every year a double-digit increase!
Debt
TROW is the only one in my portfolio which has only a 2% long-term debt. I cannot name any other company with that small amount of debt!
Forecasting, future growth
The recent trouble around TROW makes the calculation difficult about the future but it does look good. Based on 18 analysts the estimated future growth rate is 12% yearly. Analysts have a scorecard also which tells me that they are 54% right about the estimates and 46% TROW has beaten the expectations of this particular company.
Fair value
It is very clear that TROW is undervalued but by how much? I use the most widely accepted method to calculate the fair value of a company which is the Discounted Cash Flow(DCF). It is based on the premise that the fair value of a company is the total value of its future free cash flows discounted back to today’s prices.
I use analysts’ estimates of cash flows and assume the company grows at a stable rate into perpetuity. Excess Returns = (Stable Return on equity – Cost of equity) x (Book Value of Equity per share) = (28.3% – 5.76%) x $44.12 = $9.95
Terminal Value of Excess Returns = Excess Returns / (Cost of Equity – Expected Growth Rate) = $9.95 / (5.76% – 1.92%) = $258.85
Risks and overall takeaway…
TROW was the very first stock that I bought. Although right now I’m on the losing side because of the price drop I’m very proud of having this dividend monster. A very stable company which can be trusted and they are involved in many big projects around the world. Recession-proof, no debt, double-digit dividend growth.
At the current price, you will get a dividend yield above the 4-year average. I see the current price drop as the perfect opportunity to buy into TROW!
Disclosure: I have holdings in this mentioned company but I have no plans to buy more from this stock within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I have no business relationship with this particular company.