Updated Jan 27, 2023 by Nathan Parsh
Investors looking for high-quality dividend growth stocks should look first and foremost at Dividend Aristocrats. The Dividend Aristocrats are an exclusive list of 68 stocks in the S&P 500 Index with more than 25 years of consecutive dividend increases.
Dividend Aristocrats are an elite group of dividend growth stocks. For this reason, we have created a comprehensive list of all 68Dividend Aristocrats.
You can download your free copy of the Dividend Aristocrats list, along with important metrics like dividend yield and price-earnings ratio, by clicking the link below:
T. Rowe Price Group (TROW) is listed on the Dividend Aristocrats list and is one of the 7 Dividend Aristocrats in the financial industry. It has raised its dividend for 35 years in a row, including an impressive 20% increase on February 9, 2021. T. Rowe Price has a strong brand, a highly profitable business, and potential for future growth.
The stock has a dividend yield of 4.2%, which is above the average dividend yield of ~1.6% for the broader S&P 500 Index. Add it all up, and T. Rowe Price stock possesses many of the qualities dividend growth investors often look for.
T. Rowe Price was founded in 1937 by Thomas Rowe Price, Jr. In the eight decades since, T. Rowe Price has become one of the largest providers of financial services in the United States. The company currently has a market capitalization of ~$26 billion and manages nearly $1.3 trillion in assets as of this writing.
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The company offers mutual funds, advisory services, and separately managed accounts for individuals, institutional investors, retirement plans, and financial intermediaries.
T. Rowe Price has a diverse customer base in terms of assets and customer types. The company has posted an impressive track record of investment performance over the past 5 and 10 years.
Font: Investor Presentation
This is a challenging climate for asset managers. Certain investors have grown weary of the higher annual fees and trading costs. The emergence of low-cost exchange-traded funds, or ETFs, has successfully lured client assets away from traditional mutual funds that command higher fees. This has caused brokers to cut commissions and fees to retain client assets.
However, T. Rowe Price shares continue to perform well and the company has strong growth potential in the coming years.
T. Rowe Price has several catalysts for future growth. The first catalyst is a skyrocketing amount of assets under management, even after the recent declines in the market.
For the fourth quarter, final assets under management (AUM) came in at $1.27 trillion, down 12.6% from the fourth quarter of 2021, led by net customer departures of $17.1 billion, net distributions non-reinvested of $2.5 billion, customer transfers of $2.1 billion and market depreciation.
Net income fell 22.4% to $1.52 billion during the most recent quarter. Adjusted earnings per share of $1.74 compared with $3.17 in the prior year, but beat analyst estimates by $0.03.
For the year, revenue fell 15.4% to $6.5 billion, while adjusted earnings per share were $8.02 compared to $12.75 in 2021.
Share buybacks are also part of the company’s earnings-per-share growth plan. T. Rowe Price cut its weighted average diluted shares by 1.7% in 2022, a sign that management believes the stock is undervalued. Additionally, fewer shares outstanding make each share more valuable by increasing earnings per share.
Competitive advantages and performance in recession
T. Rowe Price’s competitive advantage comes from its experience and brand recognition. The company enjoys a good reputation in the financial services industry. This helps generate fees, a major revenue driver. It has built this reputation through the strong performance of mutual funds.
T. Rowe Price considers its employees to be its most valuable assets. There is a good reason for this, as it is essential for an asset management company to have qualified experts and retain the best talent. This focus on building a strong brand gives the company competitive advantages, primarily the ability to keep existing customers and attract new ones.
T. Rowe Price did not fare well during the Great Recession:
- 2007 earnings per share of $2.40
- 2008 earnings per share of $1.82 (24% decrease)
- 2009 earnings per share of $1.65 (9% decrease)
- 2010 earnings per share of $2.53 (53% increase)
Unsurprisingly, T. Rowe Price experienced a sharp drop in earnings per share in 2008 and 2009. When stock markets fall, equity investors typically withdraw funds to raise cash.
Fortunately, the company remained profitable during the recession, allowing it to increase its dividend each year. And T. Rowe Price bounced back quickly after the Great Recession. Earnings increased significantly in 2010 and by 2011 had reached a new high.
The solid balance sheet of the company is also noteworthy. In the most recent quarter, T. Rowe had $1.8 billion in cash and total assets of $11.6 (35% of which were investments) versus $1.1 billion in total liabilities and zero long-term debt.
Valuation and expected return
We expect T. Rowe Price to produce adjusted earnings per share of $7.25 by 2023. Using the recent share price of ~$114, the stock has a price-earnings ratio of 15.7. We have a target price-earnings ratio for 2028 of 14. If the stock valuation returns to the fair value estimate, total return would decline by 2.3% per year over the next five years.
The company has a strong brand, with fairly consistent profitability and earnings growth, but T. Rowe Price stock is overvalued. We see earnings per share rising at a rate of 3% per year through 2028 due to a combination of the large AUM and share buybacks.
Therefore, the total returns would consist of the following:
- 3% profit growth
- 4.2% dividend yield
- -2.3% multiple contraction
T. Rowe Price is expected to return 4.9% per year through 2028. T. Rowe Price is a particularly attractive stock for dividend growth. The company has raised its dividend for more than 36 years in a row, including an 11.1% increase for 2022. And the dividend is reasonably certain, with an expected payout rate of less than 66% this year.
Investors scouting the financial sector for dividend stocks may naturally land on the big banks. But there is only one bank stock on the Dividend Aristocrats list, People’s United Financial (PBCT).
In fact, most of the Dividend Aristocrats coming from the financial sector come from the insurance and investment management industry. This says a lot about the stability of their business models.
T. Rowe Price is an industry leader and should continue to increase its dividend each year. The focus on lower fees will continue to be a hurdle for the industry. T. Rowe Price stock earns a hold rating due to projected returns.
Additionally, the following Sure Dividend databases contain the most trusted dividend generators in our investment universe:
If you’re looking for stocks with unique dividend characteristics, consider the following Sure Dividend databases:
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