A Dividend Aristocrat is a stock that has exhibited a remarkable level of consistency, measured by the fact that only those S&P 500 companies that have increased their annual dividend for 25 straight years -- or more -- can be called one.
These companies have raised their dividends through good times and bad, including recessions, crashes, and pandemics. Being able to continue doing so is a tribute to their stability and strength. The past 18 months have been a particularly difficult economic environment to operate in, and many companies were forced to slash or hold the line on their dividends as a result.
But some companies came through it just fine, like investment manager T. Rowe Price (TROW -1.86%), which increased its dividend for the 34th straight year in 2021. Here's why you should be confident that this Dividend Aristocrat will continue to increase its dividend annually into the future as well.
Consistent earnings growth
T. Rowe Price is a top 15 asset manager in the U.S., with about $1.6 trillion in assets under management as of July 31.
The company manages funds for retail and institutional investors, and its portfolios have a history of beating their benchmarks long term. Over the past 10 years, 77% of its funds have beaten their benchmarks and 72% have outperformed the median return for their passively managed peers.
Over the past 10 years through Sept. 6, revenue for the company has increased by 10.1% on an annualized basis while net income has grown 13.4% per year over that time period.
That type of growth, combined with its operational efficiency, makes T. Rowe Price an excellent dividend stock. The company has virtually no debt and some $3.5 billion in cash, up from $2.5 billion at the beginning of the year. It has a high return on equity of 39% and a 49% operating margin, which means it makes 49% on every dollar of sales in profit after subtracting expenses.
The strong balance sheet has allowed T. Rowe Price to invest in new products and services, like exchange-traded funds (ETFs). Over the past year, the company has launched five actively managed ETFs -- the first ETFs the company has had.
Consistent earnings growth, high operational efficiency, and excess cash all contribute to T. Rowe Priceʻs ability to raise its dividend every year. In 2021, T. Rowe Price increased its quarterly dividend 20% to $1.08 per share, marking the 34th straight year the dividend has climbed.
It pays its dividend at a yield of 2%, which is higher than the S&P 500 average of 1.28%, and it has a payout ratio of about 33% based on this yearʻs earnings estimates. This is a very sustainable dividend, given that only 33% of earnings will go to the dividend.
The company keeps moving forward, as it is in the middle of two major initiatives. One is the launch of a new subsidiary, T. Rowe Price Investment Management, an independent investment advisor that will manage six current T. Rowe Price portfolios and give the firm two independent investment management platforms to expand its offerings.
CEO Bill Stromberg, who has been with the company for 35 years, including the last five as CEO, is retiring at the end of the year. He will be replaced by Rob Sharps, who has been with the company for 24 years and served under Stromberg as president. Sharps started as an analyst, was a longtime portfolio manager, and served as CIO, as well as global head of equity. It is expected to be a smooth transition.
T. Rowe Price is coming off a strong second quarter when it saw revenue increase 36% to $1.9 billion and net income climb 44% to $779 million. The stock price is up about 45% year to date, trading at around $216 per share. This is a great overall stock, not just for its fantastic dividend, but for its excellent performance, earnings, and efficiency.