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.

Strengths

 

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.

4 comments:

  1. Very nice analysis! Thank you for your work!
    One remark: the P/E ratio was under 12 in 2009 and there where several occasions in the last 10 years where the ratio was lower than today. I have a buy target at 77 - hopefully we'll be lucky. But I think, when TROW falls into this range, there is a high probability that multiple other quality stocks will be in buy range too... How do you set priorities in this case?

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    Replies
    1. Hi DR, thanks for stopping by.

      Thanks for the info on P/E ratio. Where did you get the detailed P/E history? I only looked at Morning Star data, and they are not so detailed.

      I think you are right about when TROW falls into $70s range, there is a high probability that multiple other quality stocks will be in buy range too. Actually I have GTC order for 50 shares TROW at $78. So once it falls to $78, the order will be automatically executed.

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    2. I used ycharts to visualize the P/E(TTM). Or you can use Div Son's great Google Spreadsheet to calculate another row and visualize it in a graph (http://div4son.blogspot.de/2015/02/getting-started-with-dividend-stocks.html).

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  2. Excellent analysis. I bought 20 shares at around 81 at the end of last month. Why did you pick 77 as the entry?

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