Tuesday, April 28, 2015

Stock Analysis -- T. Rowe Price Group Inc (TROW)

T. Rowe Price Group (NYSE: TROW) has been quite popular in the Dividend Growth bloggerspere. Dividend Dreams, DivGro, Dividend Mantra, Harvesting Dividends, and Passive Income Pursuit all bought shares in the lower $80s range and benefited from the recent announcement of special $2/share dividends. This aroused my interest in this company and did my due diligence on the analysis.

Company Overview


T. Rowe Price Group is the investment adviser to the T. Rowe Price family of no-load mutual funds, and is one of the largest publicly held U.S. mutual fund complexes.
T. Rowe Price offers mutual funds and separate accounts that employ a broad range of investment styles, including growth, value, sector-focused, tax-efficient, and quantitative index-oriented approaches.
At year end 2014, TROW had a record $746.8 billion of assets under management, with 78% invested in stock and blended asset portfolios, and 22% in bond and money market portfolios.

TROW SWOT Analysis


I did a SWOT analysis for T. Rowe Price Group. The purpose of this analysis is to evaluate the strengths, weaknesses, opportunities and threats involved in this potential stock purchase candidate. There are other broad market challenges and opportunities such as rising dollar, falling oil prices, and central bank actions to stimulate economic growth pose opportunities as well as challenges, as do the varying reform efforts around the globe. I didn't consider these factors in the SWOT analysis, but focused on the factors that directly affected the firm's performance.



T. Rowe Price Group operates one of the largest no-load mutual fund and life cycle fund complexes in the United States, with December 31 AUM of nearly $747 billion. It is one of the strongest brands in the industry.
TROW has outstanding performance track record. For the three-year period ended March 31, 2015, 75% of the T. Rowe Price mutual funds across their share classes outperformed their comparable Lipper averages on a total return basis, 79% outperformed for the five-year period, 88% outperformed for the 10-year period, and 78% outperformed for the one-year period. In addition, T. Rowe Price stock, bond, and blended asset funds that ended the quarter with an overall rating of four or five stars from Morningstar account for 83% of the assets under management in the firm's rated funds. The performance of the firm's institutional strategies against their benchmarks was substantially similar.
T. Rowe Price Group remains debt-free with ample liquidity, including cash and sponsored portfolio investment holdings of nearly $3.7 billion at March 31, 2015. Although TROW suffers heavy outflows, TROW remains strong earnings and revenue results. The company attributes the increased profitability to the company investing corporate cash in its own funds.
T. Rowe Price's broad line of no-load mutual funds makes it easy for investors to reallocate assets among funds (which is not the case at some smaller fund companies), contributing to increased client retention.

Opportunities, Weaknesses, and Threats


T. Rowe Price Group Inc. has suffered heavy outflows and client terminations during the past two years from asset owners reducing their U.S. equity exposure and/or seeking passive strategies.
A lot of large institutions want to use passive for an increasing amount of their equity exposure. And T. Rowe doesn't have a meaningful passive presence.
TROW's target-date franchise has been a great way of weathering these headwinds. Organic growth of T. Rowe's target-date funds significantly outpaced the industry's as a whole for the year ended Dec. 31. Its organic growth rate exceeded 13% for 2014, while the industry's was less than 10%. The firm's target-date retirement funds continue to deliver very attractive long-term performance, with 100% of these funds outperforming their comparable Lipper averages on a total return basis for the three- and five-year periods ended March 31, 2015.
TROW continues to expand globally. International clients account for about 7% of assets under management; this is an area that the company is focused on growing. The company subadvises investment assets for Daiwa SB Investments in Japan, in which TROW holds a 10% interest. Also, in early 2010, the company completed the purchase of a 26% equity interest in the Indian firm UTI Asset Management Company and an affiliate.

As usual, I'll use my stock purchase criteria as the stock analysis basis.

TROW Stock Purchase Criteria

In my total 11 check lists, TROW meets 10 of them, only with the exception of the current dividend yield.
TROW's overall quality according to my criteria is quite favorable. This stock is one of David Fish's dividend champions, with 29 consecutive years of higher dividends. S&P Capital IQ quality ranking is an "A-", and analysts' risk assessment is a "MEDIUM". Morning Star offers it a positive 3-stars rating.

Dividend Growth

TROW's current dividend yield is 2.5%, based on current market price $82.40, lower than my 3% threshold. However, I am not too concerned about it considering its current low payout ratio at around 40% (NYSE:TTM), which implies a lot of potential for future dividend growth.
TROW's 10-year dividend growth rate (DGR) is 16.60%, 5-year DGR 12%, 3-year 12.4%, and 1-year 15.8%. Based on these data and its low payout ratio, it is quite reasonable to assume that TROW will be able to maintain annual DGR above 10% in the next few years. If TROW continues to keep annual DGR at 12%, it'll take around 12 years to achieve 10% annual return, solely on a dividend basis.
  • 1-year DGR 15.8%
  • 3-year DGR 12.4%
  • 5-year DGR 12%
  • 10-year DGR 16.6%

(Data summarized from Yahoo Finance)


TROW Growth Potential

I focus on three indicators to examine companies' growth potential: earnings per share (NYSEARCA:EPS), free cash flow (NYSE:FCF), and debt to equity. Earnings per share serves as an indicator of a company's profitability. Its importance is needless to say. Free cash flow (FCF) represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base. Free cash flow is important because it allows a company to pursue opportunities that enhance shareholder value. Without cash, it's tough to develop new products, make acquisitions, pay dividends and reduce debt.
TROW's EPS growth is healthy and stable, well above dividend payments. Free cash flow remains impressively positive and strong.
  • 10-year EPS average $2.66, annual growth rate average 14%;
  • 10-year FCF average $2.69, annual growth rate average 13%;
  • 10-year dividend average $1.08, annual growth rate average 16%.

(Data summarized from Morning Star)

Debt/Equity Ratio measures a company's financial leverage calculated by dividing its long-term liabilities by stockholders' equity. T. Rowe Price remains debt-free with substantial liquidity and resources that allow them to take advantage of attractive growth opportunities; invest in key capabilities, including investment professionals, technologies, and new fund offerings.


TROW Valuation

Due to the market challenges and industry cyclicality, TROW does not match the performance of the market in recent 5 years. TROW total price appreciation is 39.95% versus SPY 77.09%.

(Data from Google Finance)

Current TROW P/E ratio is the lowest in 10 years, although its annual EPS keeps a strong and positive trend. S&P Oper. EPS 2015E is $4.92. Based on this EPS estimate and current market price, P/E is only 16.80.

(Data from Morning Star)

Based on all above analysis, I agree with Mr. Ken Moreland, chief financial officer, "Where we've seen outflows over the last 18 months have been in strategies that have been outperforming their benchmarks. It's not a performance issue. It's a macroeconomic issue." So in the long run, I have confidence in the company.

Experts offer a range of fair value estimation from $87 to $101, with an average valuation at $93.55. Current price $82.40 is around 12% discount off its fair value average.

Disclosure: I set a target entry price at $78, and will buy shares if the market price falls back to upper $70s.

Monday, April 20, 2015

Thursday, April 9, 2015

Stock purchase -- AT&T (NYSE: T)

On 04/09/15, I bought 100 shares AT&T (NYSE: T) at $32.50 per share.  Here is the summary with expected dividend income from this purchase:-

At the same time, I have 300 shares puts written at $32.  Details are as following:-

Monday, April 6, 2015

Stock Analysis -- Parker-Hannifin Corporation (NYSE:PH)

Parker (NYSE: PH) is a global leader in motion and control technologies, providing precision-engineered solutions for a wide variety of mobile, industrial and aerospace markets. Parker can be found on and around everything that moves, including aerospace, climate control, electromechanical, filtration, fluid and gas handling, hydraulics, pneumatics, process control, sealing and shielding.

PH's Industrial business makes valves, pumps, filters, seals and hydraulic components for a broad range of industries, as well as pneumatic and electromechanical components and systems. It has two segments -- Industrial North America (43% of FY 2014 sales and 51% of operating profits) and Industrial International (40% and 33%). Sales through distributors account for about half of PH's total industrial business.

The third segment is Aerospace (17% of sales and 15% of segment operating profits) which primarily makes hydraulic, pneumatic and fuel equipment used in civilian and military airframes and jet engines.
It is noticeable that for Parker, replacement part sales are generally more profitable than original equipment sales.

A friend asked me to do an analysis of this stock, I look into the company and immediately attracted by its strong cash flow, healthy earnings per share, and organic dividend growth. As usual, I'll use my stock purchase criteria as the analysis basis.

PH is one of David Fish's dividend champion, with 58 consecutive years of higher dividends. Facing looming economic environment due to oil & gas low prices and strong US dollars, people tended to worried about dividend payment prospect of companies at large.  As for PH, Chairman of the Board Donald Washkewicz re-assured investors with the company's top priority as to maintain their dividend increases.  Here is what Mr. Washkewicz said at the recent earnings call:-
Our capital allocation priorities remain the same, as they have been in the past, with our top priority to maintain our dividend increases. As you know, our dividends have been raised for 58 consecutive years. We have increased the dividend 31% this year. We announced that last quarter. And we've raised dividends 150% in the last five years. So you can see that the priority that we've put on dividends is significant.
S&P Capital IQ quality ranking is a favorable "A", and Morning Star offers an above-average 3-star rating. Analysts' risk assessment at S&P Capital IQ is "Medium" with below comments:-
Our risk assessment reflects the highly cyclical nature of the company's industrial and aviation markets, volatile energy and materials costs, and a competitive environment. This is offset by our view of PH's favorable earnings and dividend track record, as indicated by its well-above-average S&P Quality Ranking of A.
PH's beta is 1.69, reflecting its highly cyclical nature of the company's industry. It is also seen from below stock price history that PH is much more volatile than its competitor Honeywell (NYSE: HON), not to mention compared to S&P 500.  After analyzing key regional market trends and segment trends, Chairman of the Board Donald Washkewicz is optimistic about Parker's outlook by saying, "yes, there is some headwinds that we have, but the nice thing is, as Parker is so broad based in so many different market segments, there's some nice tailwinds as well that are offsetting some of the headwinds that we are seeing."

(Data based on Google data)

Parker's current dividend yield is 2.10%, lower than my 3% criterion.  However, PH's dividend growth rate (DGI) is pretty high, with 10-year average DGI at 15.1%, and 5-year average at 15.7%.  At these fast average growth speeds, it will take PH around 12 years to reach annual return 10%.  With such high DGI, Chowder number is attractively calculated at 17.8%.

Currently PH's dividend payout ratio is only 28.50%, which leaves a large room for further dividend increases.

(Data based on Yahoo data)

Parker's EPS growth is healthy and stable, well above dividend payments. Free cash flow remain healthy and strong, from the Q2 earnings release,  Mr. Washkewicz made these impressive comments regarding free cash flow, "We expect fiscal 2015 to be our 14th consecutive fiscal year, where cash flows exceed 10% of sales and we're very pleased with that record performance as well. In addition, this is also expected to be our 14th consecutive fiscal year, where free cash flow is greater than net income."

(Data based on MorningStar)

Parker is very aggressive at share buyback program.  In last October PH announced a new authorization for the purchase of $2 billion to $3 billion in shares over two years. Until the second quarter ended in Dec, the company has purchased a total of $1.2 billion shares since the October announcement. The average price that they paid for the $1.2 billion was $126.5. And the ending share count at the end of the quarter was 148.7 million.

While they continue to look for strategic acquisitions going forward, $2 billion is their committed minimum amount for the share repurchases, as confirmed by the newly elected CEO Thomas Williams.  If we review the history, PH's outstanding shares has dropped from 180 mil shares in 2005 to 150 mil shares TTM.
It is noticeable that Parker issued $1.5 billion long-term bond in November; proceeds from the bond issuance were used to fully repay commercial paper outstanding in the amount of $702 million.  The additional incremental stock buybacks will mainly be funded through operating cash flow.  Given current long-term debt to equity ratio at 47% (MorningStar data), I am not too worried about this bond issuance.

The fact I like PH most is about its business model & products character that "replacement part sales are generally more profitable than original equipment sales."  This gives PH a lot of resilience no matter the macro economy is going upwards or downwards.  On the one hand, if economy goes up to north, new OEM projects and net sales will be surely expected.  On the other hand, even if economy goes towards south, the company's replacement part sales will instead increase compared to regular says and a certain profit level is kind of warranted.

S&P Capital gives PH the 12-month target price at $153, fair value price at $131.90, and a "buy" recommendation. The analysts believe $153 target price is warranted given their view of PH's operating leverage potential and strong free cash flow generation track record. Yahoo's 1 year target price on this stock is $130.  Current market price is $118 (on 04/02/15), which is about 9.2% discount.  I would plan to add in some PH shares when market price reaches around $110, which offers me comfortable safety margin and decent upward cushion.